-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EzP8F4AM+pBFfr6qyFoy1mOnmKH3s3wglzOLsKVfTrJ8oL+4d/nAUtefEuzr9DbO bSjGIPUTmrdRTsh4tHVO9A== 0001047469-98-012544.txt : 19980331 0001047469-98-012544.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012544 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED FIRE & CASUALTY CO CENTRAL INDEX KEY: 0000101199 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 420644327 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-39621 FILM NUMBER: 98579264 BUSINESS ADDRESS: STREET 1: 118 SECOND AVE SE CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 BUSINESS PHONE: 3193995700 MAIL ADDRESS: STREET 1: P O BOX 73909 CITY: CEDAR RAPIDS STATE: IA ZIP: 52407 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange - ---- Act of 1934 for the fiscal year ended December 31, 1997 Transition Report Pursuant to Section 13 or 15(d) of the Securities - ---- Exchange Act of 1934 for the transition period from to -------- --------- Commission File Number 2-39621 UNITED FIRE & CASUALTY COMPANY (Exact name of registrant as specified in its charter) Iowa 42-0644327 ----------------------- --------------------------------- (State of Incorporation) (IRS Employer Identification No.) 118 Second Avenue, S.E. Cedar Rapids, Iowa 52407-3909 - ---------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (319) 399-5700 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X --- As of March 2, 1998, 10,711,222 shares of common stock were outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of March 2, 1998, was approximately $179,624,933. FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I: Item 1. Business 1 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39 PART III: Item 10. Directors and Executive Officers of the Registrant 39 Item 11. Executive Compensation 41 Item 12. Security Ownership of Certain Beneficial Owners and Management 44 Item 13. Certain Relationships and Related Transactions 44 PART IV: Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45 Signatures 46
PART I. ITEM 1. BUSINESS GENERAL United Fire & Casualty Company and its subsidiaries (the "Company") are engaged in the business of writing property and casualty insurance and life insurance. The Company is an Iowa corporation incorporated in January, 1946. Its principal executive office is located at: 118 Second Avenue S.E. P.O. Box 73909 Cedar Rapids, Iowa 52407-3909 (319-399-5700). The Company's subsidiaries are: A) Addison Insurance Company, a wholly owned property and casualty insurer. 1)Addison Insurance Agency, a wholly owned general agency of Addison Insurance Company. 2)Crabtree Premium Finance Company, a wholly owned premium finance company of Addison Insurance Company. B) Lafayette Insurance Company, a wholly owned property and casualty insurer. Insurance Brokers & Managers Inc., a wholly owned general agency of Lafayette Insurance Company C) United Life Insurance Company, a wholly owned life insurance company. As of December 31, 1997, the Company and its subsidiaries employed 583 full-time employees. The Company with its property and casualty subsidiaries market most forms of property and casualty insurance products, including fidelity and surety bonds and reinsurance, through independent agencies and brokers. The Company and its property and casualty subsidiaries also underwrite and broker a limited amount of excess and surplus lines insurance. The Company, through its life subsidiary, underwrites and markets ordinary life (primarily universal life), annuities (primarily single premium) and credit life products to individuals and groups through independent agencies. A table reflecting premiums, operating results and assets attributable to the property and casualty and life segments is included in Note 10 of the Notes to Consolidated Financial Statements. The following table shows the consolidated net premiums written and annuity deposits during the last three years by major category.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Fire and allied lines (1) $ 70,917 $ 66,081 $ 57,049 Automobile 53,566 52,325 44,457 Other liability 32,261 32,182 31,025 Workers' compensation 21,659 23,526 24,807 Fidelity and surety 17,542 16,586 16,215 Reinsurance 30,430 30,648 23,259 Other 540 586 734 Life and accident and health 25,705 23,598 25,181 Annuities 93,062 64,277 54,515 - ------------------------------------------------------------------------------------------------------- $345,682 $309,809 $277,242 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. MARKETING The Company markets its products principally through five branch locations. The branches are: 1) Cedar Rapids - 118 Second Avenue, S.E., P.O. Box 3909, Cedar Rapids, IA 52407-3909 2) Lombard - 2500 Highland Avenue, Suite 210, Lombard, IL 60148-5398 3) Westminster -7301 N. Federal, Suite 302, P.O. Box 850, Westminster, CO 80030-4919 4) Lincoln - 1314 O Street, Suite 500, P.O. Box 82540, Lincoln, NE 68501 5) New Orleans - 2626 Canal Street, P.O. Box 53265, New Orleans, LA 70153-3265 1 The Company is licensed as a property and casualty insurer in 35 states, primarily in the Midwest and West. Approximately 1,700 independent agencies represent the Company's property and casualty segment. The life insurance subsidiary is licensed in 24 states, primarily Midwestern and Western, and is represented by approximately 1,200 independent agencies. The branch offices of the Company are staffed with underwriting, claims and marketing representatives and administrative technicians, all of whom provide support and assistance to the independent agencies. In addition, Home Office staff technicians and specialists provide support to the subsidiaries and branch offices as well as to independent agencies. The Company's Home Office also monitors subsidiary and branch offices for overall results and conformity to Company policy through the use of management reports. In 1997, direct premium writings on a statutory basis by state were as follows.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Life, Accident and Property and Health Insurance, Casualty Insurance Including Annuities - ------------------------------------------------------------------------------------------------------- Percent Percent Amount of Total Amount of Total - ------------------------------------------------------------------------------------------------------- Arkansas $ 3,188 1.5% $ 2 0.0% California 8,713 4.1 0 0.0 Colorado 13,063 6.1 4,258 3.5 Illinois 18,390 8.6 6,603 5.5 Iowa 41,365 19.5 63,303 52.6 Kansas 10,302 4.8 2,345 2.0 Louisiana 29,537 13.9 58 0.0 Minnesota 15,300 7.2 11,915 9.9 Mississippi 7,239 3.4 214 0.2 Missouri 20,634 9.7 4,757 4.0 Nebraska 14,329 6.7 7,109 5.9 North Dakota 3,236 1.5 1,335 1.1 South Dakota 9,325 4.4 2,733 2.3 Wisconsin 7,409 3.5 10,172 8.5 Wyoming 3,215 1.5 738 0.6 Other 7,648 3.6 4,669 3.9 - ------------------------------------------------------------------------------------------------------- $212,893 100.0% $120,211 100.0% - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
The insurance industry is highly competitive, and the Company competes not only with other stock insurance companies, but also with mutual companies, the underwriters at Lloyds of London and reinsurance reciprocals. Since the Company relies heavily on independent agencies, it utilizes a profit sharing contract with the agencies as an incentive to place high quality business with the Company. For 1997, 324 agencies will receive profit sharing commissions of an estimated $5,304,000. INVESTMENTS The management of the investment portfolio is primarily handled internally. During 1997, an external investment advisor hired in 1996 was eliminated. A chief investment officer was hired to manage the investment portfolio of the Company. The Company primarily invests in fixed income securities. The Company considers itself to be a long-term investor, and generally intends, at the time of purchase, to hold most of the fixed income securities that it buys to maturity unless yield enhancement strategies provide excess returns. Most acquisitions since July 1, 1997 have been identified as available-for-sale. This is not a change in investment philosophy, but a move to enable the chief investment officer to better manage the portfolio. See Notes 1 and 2 of the Notes to Consolidated Financial Statements for discussion and information concerning SFAS No. 115. The property and casualty segment has historically emphasized investments in tax-exempt fixed income securities. At the same time, an attempt is made to maintain a balanced portfolio that reflects the Company's changing tax situation, as well as changes in the tax law. Based on the Company's underwriting philosophy and goals for this segment, the emphasis toward tax-exempt securities will continue. 2 The life insurance segment has emphasized, and will continue to emphasize, investing in high quality, taxable, fixed income securities (primarily bonds issued by corporations and mortgage related securities including collateralized mortgage obligations.) The Company strives to maintain diversification among issues, issuers, and industries, as well. Investment results for the years indicated are summarized in the following table.
- ------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------- Annualized Yield Years Ended Average Investment on Average December 31, Invested Assets (1) Income, Net (2) Invested Assets - ------------------------------------------------------------------------------- 1997 $928,052 $61,686 6.6% 1996 825,319 56,936 6.9 1995 733,608 53,603 7.3 - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
(1) Average of amounts at beginning and end of year. (2) Investment income after deduction of investment expenses, but before applicable income tax. PROPERTY AND CASUALTY SEGMENT Direct The Company with its property and casualty subsidiaries underwrite both commercial and personal lines of insurance. Homeowners and automobile insurance comprise most of the personal lines of business. Business package policies, workers' compensation, other liability and fidelity and surety bonds represent a major part of the commercial business. Specialty policies written include the Commercial Uni-Saver, a commercial package policy with a simplified rating plan, blanket mortgage security, insurance on boats, outboard motors, recreational vehicles, umbrella liability and some forms of errors and omissions insurance. Reinsurance Assumed The Company acts as a reinsurer assuming both property and casualty reinsurance from approximately 340 companies. The bulk of the business assumed is property reinsurance with the emphasis on catastrophe covers. The business originates through approximately 40 brokers with the largest producer accounting for approximately 21% of the reinsurance assumed. Reinsurance Ceded The Company follows the industry practice of reinsuring a portion of their exposure and ceding to reinsurers a portion of the premium received on the policies reinsured. Reinsurance is purchased to reduce the net liability on individual risks to predetermined limits and to protect against catastrophic losses such as hurricanes and tornadoes. Such catastrophe protection is purchased on both direct and assumed business. The limits on risks retained by the Company's property and casualty segment vary by line of business, and risks in excess of the retention limits are reinsured. For the property lines of business, the retention is $1,000,000. The following table presents the casualty business retention levels.
- ----------------------------------------------------------------------------- Accident Years Casualty Retention - ----------------------------------------------------------------------------- 1983 and prior $ 225,000 1984 through 1986 300,000 1987 through 1991 500,000 1992 through 1994 750,000 1995 and later 1,000,000 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
3 The ceding of reinsurance does not legally discharge the Company from primary liability under its policies and the ceding company must pay the loss if the reinsurer fails to meet its obligation. The Company is not aware of any of its reinsurers experiencing financial difficulties that would result in a material impact on the Company's financial statements. The Company follows the industry practice of accounting for insurance written and losses incurred net of reinsurance ceded. The Company uses many reinsurers, both domestic and foreign. There are no concentrations of credit risk associated with reinsurance. Principal reinsurers include Swiss Re of America, American Reinsurance Company (formerly Munich American Reinsurance Company), Employers Reinsurance Corporation and AXA Reassurance. The following table sets forth the aggregate direct and assumed premiums written, ceded reinsurance and net premiums written for the three years ended December 31, 1997, 1996 and 1995.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Percent Percent Percent Years Ended December 31, 1997 of Total 1996 of Total 1995 of Total - ------------------------------------------------------------------------------------------------------- Fire and allied lines (1) $ 86,200 38% $ 83,704 38% $ 74,254 38% Automobile 55,269 24 54,234 24 46,060 23 Other liability 35,645 16 35,272 16 34,101 17 Workers' compensation 22,075 10 23,834 11 25,246 13 Fidelity and surety 18,599 8 17,610 8 17,322 9 Reinsurance assumed 33,882 15 33,943 15 26,436 13 Other 799 0 808 0 1,011 1 - ------------------------------------------------------------------------------------------------------- Aggregate direct and assumed premiums written $252,469 111% $249,405 112% $224,430 114% Reinsurance ceded 25,554 11 27,471 12 26,884 14 - ------------------------------------------------------------------------------------------------------- Net premiums written $226,915 100% $221,934 100% $197,546 100% - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. Reserves Applicable insurance laws require the Company's property and casualty segment to maintain reserves for losses and loss adjustment expenses with respect to both reported and unreported losses. The Company's property and casualty segment establishes reserves for reported losses based upon historical experience and upon a case-basis evaluation of the type of loss, knowledge of the circumstances surrounding each loss and the policy provisions relating to the type of loss. The amount of reserves for unreported losses is determined by estimating unreported losses on the basis of historical and statistical information for each line of insurance with respect to the probable number and nature of losses arising from occurrences which have not yet been reported. Established reserves are closely monitored and are adjusted as needed. Loss reserves are estimates at a given time of the ultimate amount expected to be paid on incurred losses based on facts and circumstances known when the estimates are made. Reserves are not discounted. The loss settlement period on insurance losses may be many years, and as additional facts regarding individual losses become known, it often becomes necessary to refine and adjust the estimates of liability on a loss. Inflation is implicitly provided for in the reserving function through review of cost trends, historical reserving results and projections of future economic conditions. Reserves for loss adjustment expenses are intended to cover the actual cost of investigating losses and defending lawsuits arising from losses. These reserves are continuously revised based on historical analysis and management's expectations. 4 The following table sets forth statutory property and casualty net premiums earned, net losses incurred (excluding net loss adjustment expenses) and the loss ratio (ratio of net losses incurred to net premiums earned), by lines of insurance written, for the three years ended December 31, 1997, 1996 and 1995.
- ------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- Fire and allied lines (1) Net premiums earned $ 69,693 $ 62,806 $ 54,150 Net losses incurred 41,472 41,487 30,551 Loss ratio 59.5% 66.1% 56.4% - ------------------------------------------------------------------------------- Automobile Net premiums earned $ 53,207 $ 50,513 $ 42,026 Net losses incurred 35,492 42,292 30,682 Loss ratio 66.7% 83.7% 73.0% - ------------------------------------------------------------------------------- Other liability Net premiums earned $ 32,394 $ 31,953 $ 29,282 Net losses incurred 9,418 10,682 10,304 Loss ratio 29.1% 33.4% 35.2% - ------------------------------------------------------------------------------- Workers' compensation Net premiums earned $ 22,324 $ 24,207 $ 23,955 Net losses incurred 15,492 12,155 6,815 Loss ratio 69.4% 50.2% 28.4% - ------------------------------------------------------------------------------- Fidelity and surety Net premiums earned $ 16,893 $ 17,321 $ 14,592 Net losses incurred 2,086 2,195 1,269 Loss ratio 12.3% 12.7% 8.7% - ------------------------------------------------------------------------------- Reinsurance Net premiums earned $ 30,478 $ 28,390 $ 21,117 Net losses incurred 18,268 20,768 15,789 Loss ratio 59.9% 73.2% 74.8% - ------------------------------------------------------------------------------- Other Net premiums earned $ 521 $ 591 $ 872 Net losses incurred 105 114 334 Loss ratio 20.2% 19.3% 38.3% - ------------------------------------------------------------------------------- Total property and casualty Net premiums earned $225,510 $215,781 $185,994 Net losses incurred 122,333 129,693 95,744 Loss ratio 54.2% 60.1% 51.5% - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) "Fire and allied lines" includes farmowners, homeowners, commercial multiple peril and inland marine. The combined ratios on the following page, which relate to the property and casualty segment, are the sum of the following: the loss ratio, calculated by dividing net losses and net loss adjustment expenses incurred by net premiums earned; and the expense ratio, calculated by dividing underwriting expenses incurred by net premiums written. The ratios in the table have been prepared on the basis of statutory financial information and on a GAAP basis. Generally, if the combined ratio is below 100 percent, there is an underwriting profit; if it is above 100 percent, there is an underwriting loss. [A bar graph displaying statutory combined ratios for the company as compared with the Insurance Industry from 1993 to 1997 appears here.] Statutory Combined Ratios
Company Industry 1993 102.5 106.9 1994 97.6 108.5 1995 95.8 106.5 1996 104.4 105.8 1997 98.4 101.8
5
- --------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------- Statutory GAAP - --------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- Net premiums written $226,915 $221,934 $197,546 $226,915 $221,934 $197,546 Net premiums earned 225,510 215,781 185,994 225,822 215,470 185,994 - --------------------------------------------------------------------------------------------------------- Losses and loss adjustment expenses 66.6% 72.7 % 63.8% 66.2% 72.3 % 63.6% Underwriting expenses 31.8 31.7 32.0 33.0 33.0 31.0 - --------------------------------------------------------------------------------------------------------- Combined ratios 98.4 104.4 95.8 99.2 105.3 94.6 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- Underwriting margin 1.6% (4.4)% 4.2% 0.8% (5.3)% 5.4% - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
The following table shows the calendar year development of the unpaid losses and loss adjustment expenses of the property and casualty segment for 1988 through 1997. The top line of the table shows the estimated liability for unpaid losses and loss adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for losses arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported, net of applicable ceded reinsurance. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known. The botton portion of the table displays cumulative losses and loss adjustment payments for each of the years indicated.
- ---------------------------------------------------------------------------------------------------------------------- Years Ended December 31 - ---------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ---------------------------------------------------------------------------------------------------------------------- Liability for Unpaid Losses and LAE $85,012 $103,607 $113,572 $123,219 $158,825 $170,798 $180,653 $188,700 $209,876 $218,912 Liability re- estimated as of: One year later 79,869 96,487 111,804 128,042 154,572 153,691 160,776 159,571 176,332 Two years later 80,395 96,976 112,390 125,888 148,507 142,572 172,546 145,486 Three years later 76,698 97,295 111,276 124,428 144,159 158,312 164,133 Four years later 76,469 95,752 113,898 122,384 134,309 155,313 Five years later 75,368 96,345 113,703 118,568 132,075 Six years later 75,257 97,159 103,303 117,648 Seven years later 75,912 79,024 102,318 Eight years later 69,518 78,624 Nine years later 69,069 - ---------------------------------------------------------------------------------------------------------------------- Redundancy $15,943 $ 24,983 $ 11,254 $ 5,571 $ 26,750 $ 15,485 $ 16,520 $ 43,214 $ 33,544 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Cumulative amount of liability paid through: One year later $27,277 $ 37,598 $ 39,497 $ 44,694 $ 54,291 $ 51,550 $ 80,246 $ 56,618 $ 61,694 Two years later 41,865 56,574 63,589 69,296 84,074 102,637 109,281 83,071 Three yearslater 52,551 69,767 77,141 87,052 96,976 119,349 123,469 Four years later 57,658 76,443 87,627 95,059 107,420 127,333 Five years later 61,795 82,013 85,379 99,483 112,360 Six years later 64,912 67,021 88,558 102,677 Seven years later 60,026 69,314 90,575 Eight years later 61,339 70,315 Nine years later 62,139 - --------------------------------------------------------------------------------------------------------------------
6 LIFE INSURANCE United Life Insurance Company is in the business of writing life insurance. Incorporated in May, 1962 and commencing business in October, 1962, the Iowa based corporation is wholly owned by the Company and has no subsidiaries. United Life Insurance Company underwrites and markets single-premium whole life insurance, term life and universal life insurance, annuities, credit insurance and individual disability income products. In the 1980s, United Life Insurance Company was one of the first companies in the nation to offer universal life products. While United Life Insurance Company's lead annuity product is a single premium deferred annuity, it also offers flexible premium annuities. The credit business involves the sale of credit life and credit accident and health products, working in conjunction to satisfy the need for debt protection in the event of disability and/or death. United Life Insurance Company also offers an individual disability income rider that is attached to the ordinary life insurance products. Total life insurance in force, before reinsurance, is $3,403,208,000 as of December 31, 1997. Universal life represents 55% of insurance in force at December 31, 1997, compared to 57% at December 31, 1996. The following table presents net premium information for the last three years.
- -------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Universal life $ 7,495 $ 7,381 $ 7,926 Ordinary life (other than universal) 5,605 6,760 9,647 Accident and health 2,821 2,191 1,822 Annuities 1,151 1,434 902 Credit life 1,977 1,528 1,217 Group accident and health 182 141 125 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total net premiums earned $19,231 $19,435 $21,639 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Reinsurance Ceded United Life Insurance Company reinsures a portion of its exposure and cedes to reinsurers a portion of the premium received on the policies reinsured. Reinsurance is purchased to reduce the net liability on individual risk to predetermined limits. United Life Insurance Company retains $200,000 per insured and reinsures the excess. The ceding of reinsurance does not legally discharge United Life Insurance Company from primary liability under its policies and the ceding company must pay the loss if the reinsurer fails to meet its obligation. United Life Insurance Company is not aware of any of its reinsurers experiencing financial difficulties that would result in a material impact on its financial statements. United Life Insurance Company follows the industry practice of accounting for insurance written and losses incurred net of reinsurance ceded. United Life Insurance Company's primary reinsurance companies are ERC Reinsurance Company, Minnesota Mutual Life Insurance Company and Business Men's Assurance Company of America. These companies insure both life and disability risks. Reserves United Life Insurance Company's reserves meet, or exceed, the minimum statutory Iowa Insurance Law requirements. These reserves are developed and analyzed by independent consulting actuaries. Their presentation in this report differs from the statutory basis and is described in Note 1 to the Consolidated Financial Statements. 7 ITEM 2. PROPERTIES The Company owns two buildings in Cedar Rapids, Iowa, which it occupies as its Home Office. One building is a five-story building which is occupied entirely by the Company. The other is an eight-story office building in which the first floor is leased to tenants. The Company occupies the fourth through eighth floors of this building and rents the third floor and an office on the second floor to its subsidiary, United Life Insurance Company. The two buildings are connected with a skywalk. The Company owns a small parking lot adjacent to the eight-story building and a parking lot adjacent to the five-story building. Lafayette Insurance Company owns one building in New Orleans, Louisiana which serves as its Home Office. The building consists of two floors of office space and a floor of parking, as well as a parking lot located adjacent to the building. Management believes that the properties of the Company are adequate for conducting its business. ITEM 3. LEGAL PROCEEDINGS The registrant has no pending legal proceedings other than ordinary routine litigation incidental to the business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded in the over-the-counter market under the NASDAQ symbol UFCS. On March 2, 1998, there were 954 holders of record of the Company's common stock. The following table sets forth, for the calendar periods indicated, the high and low bid quotations for the common stock and cash dividends declared. These quotations reflect inter-dealer prices without retail markups, markdowns or commissions and may not necessarily represent actual transactions. The Company's policy has been to pay quarterly cash dividends and the Company intends to continue that policy. Payments of any future dividends and the amounts of such dividends, however, will depend upon factors such as net income, financial condition, capital requirements and general business conditions. The Company has paid dividends every quarter since March, 1968. State law permits the payment of dividends only from statutory accumulated earned profits arising from business. The Company's subsidiaries are also subject to state law restrictions on dividends. See Note 7 in the Notes to Consolidated Financial Statements.
- -------------------------------------------------------------------- Cash Share Price Dividends High Low Declared - -------------------------------------------------------------------- 1997 Quarter Ended March 31 37 29 3/4 $ 0.15 June 30 40 30 0.16 September 30 41 1/2 37 0.16 December 31 47 38 1/2 0.16 1996 Quarter Ended March 31 37 1/4 27 3/8 $ 0.15 June 30 40 29 3/16 0.15 September 30 35 1/2 30 0.15 December 31 38 30 0.15 - --------------------------------------------------------------------- - ---------------------------------------------------------------------
8 ITEM 6. SELECTED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - ------------------------------------------------------------------------------------------------------------ Years Ended December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ Total assets $1,157,922 $1,024,835 $937,594 $828,126 $733,020 Operating revenues Net premiums earned 244,939 234,797 207,528 184,748 174,137 Investment income, net 61,686 56,936 53,603 46,420 40,233 Realized investment gains and other income 2,676 6,726 1,698 796 1,860 Commission and policy fee income 1,829 1,815 1,761 1,881 1,713 Net income 28,732 21,960 28,803 22,521 18,645 Earnings per common share 2.68 2.04 2.66 2.08 1.72 Cash dividends declared per common share 0.63 0.60 0.55 0.49 0.45 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
Earnings per common share and cash dividends declared per common share have been retroactively restated for additional shares issued as a result of a three for two stock split to stockholders of record as of December 18, 1995. The selected financial data herein has been derived from the financial statements of the Company and its subsidiaries. The data should be read in conjunction with "The Chairman's Report," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes. [A bar graph displaying earnings per common share and dividends declared for the five years ended December 31, 1997 appears here.] Earnings Per Common Share
Earnings Per Common Dividends Share Declared 1993 1.72 0.45 1994 2.08 0.49 1995 2.66 0.55 1996 2.04 0.60 1997 2.68 0.63
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ASSETS The Company's total assets grew by 13% to $1,157,922,000 in 1997. A majority of the increase was in the portfolio of fixed income securities. The Company's investment strategy has been to invest primarily in long-term, high-quality securities. Held-to-maturity investments comprise 82% of the total fixed income portfolio, as compared to 91% at December 31, 1996. During 1997, the Company purchased and classified more securities as available-for-sale in an effort to expand its portfolio management strategy and to increase total returns. The Company expects this trend to continue in 1998. The Company did not classify any securities as trading in 1997 or 1996. Net unrealized gains of $1,913,000 were recorded in 1997 on the available-for-sale fixed income securities, compared to net unrealized losses of $1,415,000 in 1996. Approximately 22% of the fixed income portfolio is invested in collateralized mortgage obligations ("CMOs"), compared to 26% at December 31, 1996. The Company did not add to its mortgage-backed securities/CMO holdings during the last half of 1997. Returns were not as attractive as those found in other investment alternatives. The Company minimized its prepayment risk by buying most issues priced at a slight discount. While buying at a discount does not prevent prepayment, the yield is not penalized as is the case when a premium is paid. In addition, although the stated maturity is longer than the average life of the issues, the Company concentrated on buying issues with an expected maturity in the seven-to-twelve-year range. 9 Using a conservative investment practice the Company last utilized in 1987, the Company started writing covered call options on approximately 1% of its equity portfolio to generate additional portfolio income. This program will continue to be utilized and expanded as situations and market conditions merit such use. The Company also invests in common and preferred stocks, all of which are classified as available-for-sale. Other long-term investments are primarily holdings in limited partnership funds investing in banks and insurance companies. Net unrealized appreciation on stocks and other long-term investments increased $38,859,000, or 58% in 1997 compared to 1996. Flat growth in premiums resulted in a 1% increase in accounts receivable from property and casualty insurance agents and brokers. The balance of this asset at December 31, 1997 was $44,060,000, compared to $43,433,000 at December 31, 1996. Deferred policy acquisition costs ("DAC") are expenses such as commissions, premium taxes and other costs associated with underwriting insurance policies. At the beginning of a policy period, an asset is established for the associated costs, and is then amortized over the lives of the respective policy terms to achieve a matching of expenses to revenue. In 1997, the Company's DAC increased 7%. Property and equipment grew by 14% to $14,443,000 during 1997 due primarily to purchases, net of disposals, of $1,362,000 in new electronic data processing equipment. Losses, expenses and reserves that are due to the Company from reinsurance brokers are classified as reinsurance receivables. This balance increased by $1,940,000 or 16% in 1997. The Company has not experienced significant collection problems with regard to these receivables and has no information indicating that any of its current reinsurance balances are uncollectible. CASH FLOW AND LIQUIDITY Most of the cash that the Company receives is generated from insurance premiums paid by policyholders. The premiums are invested in assets maturing at regular intervals in order to meet the Company's obligations to pay policy benefits, claims and claim adjusting expenses. Net cash provided by the Company's operating activities was $43,211,000 in 1997, compared to $43,921,000 in 1996. Operating cash flows continue to be ample to meet policyholders obligations. Short-term investments, composed of money market accounts and fixed income securities are available for the Company's short-term cash needs. In addition, a six-million dollar line of credit is maintained with a local bank. During 1997, the Company borrowed $1,000,000 against the line of credit for 4 days. No funds were borrowed during 1996. LIABILITIES The property and casualty segment's gross liability before reinsurance for losses and settlement expenses increased 5% to $231,768,000 between 1997 and 1996. Gross reserves remaining on the 1994 Northridge earthquake were $4,058,000 as of December 31, 1997, compared to $4,599,000 at December 31, 1996. This is the only significant catastrophe related reserve that the Company has for both years. The Company is not aware of any significant contingent liabilities as far as environmental issues are concerned. Because of the type of property coverage the Company writes, there exists the potential for exposure to environmental pollution and asbestos claims. The Company's underwriters are aware of these exposures and use limited riders or endorsements to limit exposure. 10 The liability for future policy benefits and interest on policyholders' accounts increased 12%, due primarily to two factors. First, this liability is increased immediately by the full premiums paid by policyholders for annuity products and most universal life products. In 1997, the Company received premiums of $57,734,000 in non-internal rollovers on annuity products and $13,550,000 on universal life products. These same two product lines had $22,510,000 of interest credited during 1997 which also causes a direct increase to future policy benefits. In addition, fluctuations in surrender benefits paid as well as the future policy benefits for other product lines account for the remainder of the change. The Company's employee benefit obligations increased $1,901,000 or 28% in 1997, compared to 1996. Changes to the pension plan benefits formula and new early retirement provisions contributed to this increase. Deferred income taxes grew 120% to $27,868,000. A deferred tax liability of $37,549,000 on unrealized appreciation was a major contributor to the growth in this liability. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996 PROPERTY AND CASUALTY OPERATIONS The property and casualty segment had a statutory combined ratio (net losses incurred and net loss adjustment expenses incurred to net premiums earned, plus expenses incurred to premiums written) of 98% for the year ended 1997, compared to 104% for 1996. The Company has experienced very moderate premium growth, as has most of the property and casualty industry. Premiums written increased 2% between 1997 and 1996. Overall industry growth is projected to be around 3%. On the loss side, the Company's automobile lines of business improved considerably in 1997, with a loss ratio (net losses incurred to net premiums earned) of 66.7%, compared to 83.7% in 1996. Another significant line of business for the Company is other liability with a loss ratio of 29.1% in 1997, compared to 33.4% in 1996. The reinsurance line also showed substantial improvement decreasing to 59.9% in 1997 from 73.2% in 1996. Results in the workers' compensation line deteriorated in 1997, when compared to 1996. Net premiums earned decreased $1,883,000 or 8% and the loss ratio rose to 69.4% from 50.2% in 1996. An increase in claims severity in 1997, as well as continuing rate reductions due to competition have contributed to these results. A lack of significant catastrophe exposure has contributed to the Company's favorable underwriting results. The property and casualty segment sustained approximately $6,780,000 in gross direct catastrophe losses in 1997. The heaviest storm activity occurred in the states of Iowa, Illinois, Kansas, Wisconsin, and Nebraska during the spring, where hail and wind caused approximately $4,106,000 in incurred property damage. The remaining catastrophe activity occurred throughout the year in Louisiana, Arkansas, North Dakota, Colorado, and Mississippi. Gross incurred on all catastrophe losses for the years ending 1997, 1996 and 1995 were $8,926,000, $13,350,000 and $13,936,000, respectively. Ceded incurred on all catastrophes for the years ending 1997, 1996 and 1995 were $1,313,000, $2,839,000 and $3,119,000, respectively. The property and casualty segment's underwriting and acquisition expenses increased 2% to $74,992,000. The 2% growth in premium writings have produced corresponding moderate increases in expenses such as commissions and other policy related expenses. LIFE OPERATIONS The Company's earnings decreased $2,071,000 or 26% in 1997 compared to 1996. Much of this can be attributed to an adjustment to deferred acquisition costs which resulted in additional amortization of approximately $2,057,000 which was a result of an acceleration of amortization of prior years' amounts deferred. 11 Losses incurred showed an increase of $4,190,000 over 1996 primarily due to an increase in claim activity during the fourth quarter. An increase in retention from $100,000 to $200,000 per insured effective January 1, 1995, contributed to the increase in losses. In addition, claims activity has grown due to a significant increase in the credit life and credit accident and health blocks of business. The amount of insurance in force in these lines increased by $37,201,000 or 25% over 1996. The life segment's realized gains decreased $1,141,000 in 1997 compared to 1996. The gains in 1996 were a result of the Company taking advantage of market conditions and selling a few of its available-for-sale fixed income securities. INVESTMENT RESULTS Growth in the Company's portfolio of fixed income securities contributed to the 8% increase in investment income. For 1996, realized gains and other income included $2,074,000 of interest received in connection with the settlement of a Federal income tax Revenue Agent Review for previous tax years. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995 PROPERTY AND CASUALTY OPERATIONS Property and casualty premiums earned increased 16%, or $29,476,000 in 1996, when compared to 1995. Our direct business provided a majority of the growth, with much of the increase concentrated in the midwestern states and Louisiana. Loss and settlement expenses incurred by the property and casualty segment for 1996 increased 32% or $37,589,000 over 1995. While 1996 and 1995 produced an unusually large number of hurricanes, the Company did not have much exposure related to these storms. Several other factors did contribute to underwriting results. The Company's consistent and long-term growth inevitably led to a higher number of claims. During the first quarter of 1996, frigid weather causing frozen water pipes resulted in substantial water damage. Several large fire losses also occurred during the first few months of the year. Wind and hail storms occurring during the summer months in the midwestern states led to an increase in loss activity. In addition, a small number of large commercial auto liability losses were incurred throughout the year. In 1996, the Company's largest catastrophe loss incurred year-to-date was the 1994 Northridge earthquake, with gross losses incurred of $3,149,000 in 1996 compared to $3,847,000 in 1995 and $10,342,000 in 1994. Ceded losses incurred related to this catastrophe were $2,882,000 in 1996, compared to $3,005,000 in 1995 and $4,319,000 in 1994. Gross incurred on other catastrophe losses for the years ending 1996, 1995 and 1994 were $10,200,000, $10,089,000 and $5,784,000, respectively. Ceded incurred on all other catastrophes for the years ending 1996, 1995 and 1994 were $(43,000), $114,000 and $(17,000), respectively. The $12,280,000 increase in property and casualty underwriting and acquisition expenses was primarily due to an increase in commissions, premium taxes and other policy issue expenses, associated with growth in premiums. 12 LIFE OPERATIONS The decrease of $2,204,000 in premiums earned was attributable to a decrease in collected traditional life premiums of $2,854,000. One product, single premium whole life, saw a decrease of $3,591,000. Other underwriting and operating expenses decreased $1,979,000 due to a larger deferral of expenses associated with acquisition of new business. An increase in premiums collected of $10,305,000 in the single premium deferred annuity block along with additional acquisition expenses is responsible for 50% of this decrease. The balance of the decrease was due to a combination of slight increases in premiums collected and refinement in the way deferrable acquisition expenses are determined and allocated. Interest credited was flat in 1996 for two reasons. First, one block of universal life had withdrawals of $15,125,000 in December, 1995 and $15,561,000 in the first two months of 1996, which caused a reduction of approximately $2,025,000 in interest credited in 1996 compared to 1995. Second, deferred annuity policies with a five-year interest rate guaranteed between 7.1% and 8.0% renewed in 1996 at a rate between 5.0% and 5.5% representing approximately a $500,000 decrease in interest credited. Also, all deferred annuity policies with guarantees of less than 6.5% earned up to 1.0% less in 1996. INVESTMENT RESULTS Growth in the Company's fixed maturity portfolio contributed to the 6% increase in investment income. The unusual increase in realized gains and other income resulted from primarily two sources. The Company took advantage of market conditions and sold a small number of its available-for-sale fixed income securities. In addition, the settlement of a Federal income tax Revenue Agent Review for previous tax years resulted in the receipt of $2,074,000 in interest, which is included in realized investment gains and other income. REGULATION The insurance industry is governed by the National Association of Insurance Commissioners ("NAIC"), as well as individual state insurance departments. These governing agencies are working on a project to codify insurance statutory accounting practices. Currently, these practices are prescribed in a variety of publications, as well as state laws, regulations, and general administrative rules. The project, originally expected to be completed by January 1, 1998, has been extended to 1999. It is expected that the new rules would have financial effects on the insurance industry's statutory results, including those of the Company. Due to the incomplete and complex proposed changes, it is impossible to estimate the impact at this time. The changes would not affect the accompanying financial statements, which are based on generally accepted accounting principles. As part of the NAIC and state insurance department's solvency regulations, the Company is required to calculate a minimum capital requirement based on insurance risk factors. The risk based capital results are used to identify companies that merit regulatory attention or the initiation of regulatory action. At December 31, 1997 and 1996, both the property and casualty and the life segment had capital well in excess of their required levels. The Company is not aware of any other current recommendations by the NAIC or other regulatory authorities in the states in which the Company conducts business which, if or when implemented, would have a material effect on the Company's liquidity, capital resources or operations. 13 YEAR 2000 The insurance industry is data intensive and utilizes computer technology extensively. An important issue facing all computer users is the approaching Year 2000. Many computer systems and applications have been designed with two-digit date fields. With the turn of the century, these programs may recognize the Year 2000 as 1900 or not at all. If left unresolved, this could cause systems to process critical financial and operational information incorrectly. The Company is aware of this issue and is finalizing its systems for compliance for the Year 2000. Beginning in 1984, programming to accommodate four-digit date fields was initiated. Testing is currently being conducted on all systems and will be completed in 1998. Expenses incurred in connection with the conversions and testing have been expensed as incurred and absorbed into normal operating expenses. The remaining costs for Year 2000 compliance are not expected to be material to operations. The Company is also reviewing its third-party vendors for compliance with Year 2000 and has received many affirmative responses. While the Company is reviewing its third part vendors' Year 2000 compliance, it cannot assure that the systems of these vendors that the Company relies on will be converted in a timely manner, or that their failure to convert would not have an adverse affect on the Company's systems. OUTLOOK Management expects premium growth to be modest to flat during 1998. The Company will continue to explore new geographic areas, in addition to our current development of Arkansas, Mississippi and New Mexico, for expansion. The loss frequency to date for 1998 has been down due to the mild winter throughout the Company's major exposure areas, giving the year a good start. However, the storm season is fast approaching and El Nino hasn't finished yet. A new management team was created with the appointment of John A. Rife, a 21-year veteran with the Company, as President. He maintains his position as President of United Life Insurance Company, a position he has held for 13 years. Kevin Kubik joined the Company, filling the newly created position of Vice President and Chief Investment Officer. The Company sold a small subsidiary, Crabtree Premium Finance Company, a premium finance company which was not contributing to Company growth or service strategy. On February 27, 1998, most of the assets of this subsidiary were sold to Mepco Insurance Premium Financing, Inc. of Chicago, Illinois. CHAIRMAN'S REPORT The good news is that last year your Company's net income increased 31% to $28,732,000 or $2.68 per share, just $71,000 shy of a record. In 1995, its best year ever, it earned $28,803,000 or $2.66 per share (that year there was an average of 102,000 more shares outstanding than in 1997). Stockholders' equity increased $49,349,000 or 22% to $277,208,000 or $ 25.84 per share. The return on equity was 11%. During the year the market value of your United Fire shares increased 25% while the Dow Jones Industrial Average increased 23% and the S&P 500 increased 31%. Over the past five years, United Fire & Casualty's stock has not been a bad proxy for the S&P 500, slightly outperforming it, with a total return including dividends of 169% or an annual equivalent of 22% while the index had a total return of 151% or an annual equivalent of 20%, once again demonstrating that insurance stocks can be a good investment for the long term investor. Your Company's combined ratio, a measure of the underwriting profitability of its property and casualty business, improved by six points to 98%. Over the past five years it has averaged 100%. Fortunately during the year we experienced no major catastrophes. The bad news is that last year underwriting experience for all property/casualty companies improved and the industry posted record earnings. Four years of a soft market with no relief in sight and the industry's combined ratio decreased by four points to 102%, its lowest in 18 years. According to the Property Claim Service, the 25 catastrophes reported during 1997 was the lowest number since 1987. It was a difficult year not to make money in the insurance business unless one were in the managed care business. A booming stock market made even the most inept insurance company managements look good. 14 Indicative of the soft environment in which we operate, total property and casualty premiums written increased by only 2% to $226,915,000 while direct workers' compensation premiums actually declined by 3%. Most of our growth came from our Denver and New Orleans regional offices which both had a very good year from a loss ratio and a production standpoint. Denver expanded into New Mexico and New Orleans continued to develop Mississippi and Arkansas to balance its exposures in Louisiana. The outlook for growth this year is not encouraging and we are not going to pursue business we believe to be inadequately priced. With medical costs once again on the rise and worker's compensation rates continuing to be under pressure the prospects for that line are not good. Life insurance premiums increased 8% to $21,955,000 and annuity premiums, which are not included as insurance premiums under GAAP accounting, amounted to $92,095,000. Banks, especially small-town banks, continue to be an increasingly important source of this business and we were generally able to maintain our spread on this business despite a decline in interest rates. Life insurance earnings decreased $2,071,000 to $6,061,000 resulting in a return on equity for the life insurance segment of our business of 8%. In 1996 our life insurance earnings were favorably impacted by realized gains of $1,361,000 compared to $220,000 this year. Rather than storms, pestilence or plagues, your Company's story this year is the story of its most important asset, its people. While I was indisposed most of the year, they performed admirably and demonstrated that if CEOs aren't completely unnecessary, they are a very expensive luxury that certainly aren't worth nearly what they are paid. Last May, John Rife, who has been the President of United Life Insurance Company for the past 13 years, was also named President of United Fire & Casualty Company. As I was sure it would be, his appointment has been well received by the staff. I am confident he will continue the people-oriented policies which I believe have been one of the foundations for your Company's success. Actually, John had been my point person since my hospitalization earlier in the year. Under John's leadership, United Life has grown to a company with over $596,000,000 in assets and the book value of your Company's $24,473,000 investment has grown to over $97,000,000. In recent years it has consistently been one of the best performers among its peers, i.e., small to medium-sized life insurers affiliated with property and casualty companies. Not bad for a company that is in a category that A.M. Best and other pundits say is doomed to failure. In June, Kevin Kubik joined us as Vice President of Investments. For over 50 years, the investment of your Company's funds has been the province of the McIntyres, first my father who started his career in the investment business and then yours truly. We have always believed in making our own mistakes rather than paying someone else to make them for us. However, when our invested assets surpassed three-quarters of a billion dollars it became apparent that managing them could no longer be handled on a part-time basis. It would be nice to say we found Kevin, but in fact he found us and his timing couldn't have been better. After a career which included experience with the investment departments of two life insurance companies and as a fixed-income manager with a large money manager in Chicago, he wanted to return to Cedar Rapids to raise his family. We're glad he did. One of my favorite pastimes is looking at insurance companies that might be acquisition candidates. Several years ago we were interested in a small Iowa life insurance company that was for sale. Their products were compatible with ours, we used the same actuary and even the names were similar. We thought it would make a good fit with our United Life but could never make a deal. In the course of our discussions we discovered one of their hidden assets was the assistant in their accounting department. Later Sam Hague joined us to head up our Life Accounting Department. When John assumed responsibility for our entire operations, Sam was promoted to Executive Vice President of United Life responsible for all our life operations. In a position usually filled by "high-pressure sales types" he's doing an excellent job. One reason we never stop looking is you never know when you're going to find a gem. On July 1, Mike Hansen, Vice President in charge of our Fidelity and Surety Department, retired. Mike, who was our surety claims person (note: I can be politically correct, too) assumed responsibility for the department in 1989 when Dick Ehlinger passed away. At the time, many so-called experts questioned our judgment in putting a claims person in charge of the department, but Mike proved them wrong. Under Mike's leadership the department's premiums grew from $6,278,000 to $17,542,000 and its loss ratio averaged 10.4%. Now it's Jeff Chapin's and Dave Lange's turn. With a staff of 23 professionals we have no doubt they will succeed. 15 If the pundits are to be believed, sometime within the next two years the economy is going to grind to a halt, the sky will fall and chaos will reign as federal, state and local governments, credit cards and nearly every other aspect of modern life become infected with the Year 2000 virus. However, we are not panicking. Maybe we just don't know any better, but perhaps our policy of developing most of our major software systems in-house rather than relying on outside vendors permitted our Information Services Department to foresee and address this problem sooner than many. We think so and just to make sure will be running another test of all our systems this summer. The trend towards consolidation, which has been sweeping all financial services, continues to gain momentum in the property and casualty business. Two recent mergers that particularly interested us were Safeco's acquisition of American States and St. Pauls' pending acquisition of USF&G. Going back to the days of John Phelan, the long-time president of American States and a very good insurance person who built it into a well-respected company and who, like my father, flew his own plane, no company has made more passes at us over the years than American States. The story was always the same, they were larger, they had Lincoln National behind them, they would survive and we would make a good fit. Funny thing, we're still here but they aren't around anymore. Like USF&G, your Company is often referred to in the trade by its initials, UF&C and the similarity has sometimes caused confusion. When we were small and unknown we took it as a compliment, later as USF&G lost its way and got into trouble it became an embarrassment. Therefore, we were pleased when the St. Paul announced they would spend $2.8 billion to solve our problem of mistaken identity. Another trend is demutualization. Even "the rock" is now considering becoming a stock company. Over two hundred years ago, Adam Smith extolled the virtues of the profit motive in the "Wealth of Nations". Today, even in what was once the Communist empire, its value is acknowledged so it shouldn't be any surprise that the managements of mutual insurance companies are finally beginning to see the light, too. One of the insurance departments' challenges will be to restrain managements' greed and make sure the mutuals' policyholders are fairly compensated for the surplus their managements covet. For the fifth consecutive year, Ward Financial Group, an insurance consultant, named your Company one of the 50 outstanding property/casualty companies in the United States based on performance and security. This may become a boring story, but one which we never tire. On May 20th, your Board of Directors voted to increase the dividend seven percent to $.64 per share. This too is becoming a boring story, but one of which, hopefully, you won't tire either. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets December 31, 1997 and 1996
- ---------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Number of Shares) - ---------------------------------------------------------------------------------------------------------- ASSETS 1997 1996 - ---------------------------------------------------------------------------------------------------------- Investments (Notes 2 and 3) Fixed maturities Held-to-maturity, at amortized cost (market value $709,867 in 1997 and $668,541 in 1996) $ 677,360 $ 651,138 Available-for-sale, at market (cost $145,019 in 1997 and $69,317 in 1996) 146,932 67,902 Equity securities (cost $26,296 in 1997 and $25,898 in 1996) 128,698 91,314 Mortgage loans 2,862 2,959 Policy loans 8,405 7,591 Other long-term investments, at market (cost $9,000 in 1997 and $8,395 in 1996) 12,448 9,970 Short-term investments 19,195 29,330 - ---------------------------------------------------------------------------------------------------------- $ 995,900 $ 860,204 Cash and Cash Equivalents 2,378 14,389 Accrued Investment Income (Note 3) 14,159 12,195 Accounts Receivable (net of allowance for doubtful accounts of $1,030 in 1997 and $597 in 1996) 44,060 43,433 Deferred Policy Acquisition Costs 60,215 56,083 Property and Equipment, primarily land and buildings, at cost, less accumulated depreciation of $15,781 in 1997 and $15,443 in 1996 14,443 12,630 Reinsurance Receivables (Note 5) 14,430 12,490 Prepaid Reinsurance Premiums 4,064 4,229 Intangibles 1,082 1,335 Income Taxes Receivable (Note 8) - 709 Other Assets 7,191 7,138 - ---------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,157,922 $1,024,835 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------- Liabilities Future policy benefits and losses, claims and settlement expenses (Notes 5 and 6) Property and casualty insurance $ 231,768 $ 221,207 Life insurance (Note 3) 482,437 431,582 Unearned premiums 108,296 105,008 Accrued expenses and other liabilities 18,373 19,721 Employee benefit obligations (Note 9) 8,665 6,764 Income taxes payable (Note 8) 3,307 - Deferred income taxes (Note 8) 27,868 12,694 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES $ 880,714 $ 796,976 - ---------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, $3.33 1/3 par value; authorized 20,000,000 shares (Note 12) 10,727,322 shares issued and outstanding in 1997 10,727,712 shares issued and outstanding in 1996 $ 35,758 $ 35,759 Additional paid-in capital 9,331 9,342 Retained earnings (Note 7) 161,906 139,933 Net unrealized appreciation, net of applicable income taxes of $37,549 in 1997 and $22,750 in 1996 (Note 2) 70,213 42,825 - ---------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 277,208 $ 227,859 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,157,922 $1,024,835 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 17 Consolidated Statements of Operations Years Ended December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - ---------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Revenues Net premiums earned (Note 5) $ 244,939 $ 234,797 $ 207,528 Investment income, net (Note 2) 61,686 56,936 53,603 Realized investment gains and other income (Note 2) 2,676 6,726 1,698 Commission and policy fee income 1,829 1,815 1,761 - ---------------------------------------------------------------------------------------------------------------- $ 311,130 $ 300,274 $ 264,590 - ---------------------------------------------------------------------------------------------------------------- Benefits, Losses and Expenses Losses and settlement expenses $ 159,199 $ 161,293 $ 125,548 Increase in liability for future policy benefits 5,016 8,817 7,695 Amortization of deferred policy acquisition costs 52,380 48,364 44,557 Other underwriting expenses 33,857 33,722 28,212 Interest on policyholders' accounts 22,510 20,701 20,528 - ---------------------------------------------------------------------------------------------------------------- $ 272,962 $ 272,897 $ 226,540 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes $ 38,168 $ 27,377 $ 38,050 Federal income taxes (Note 8) 9,436 5,417 9,247 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 28,732 $ 21,960 $ 28,803 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Earnings per common share (Note 12) $ 2.68 $ 2.04 $ 2.66 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding (Note 12) 10,727,440 10,773,591 10,829,606 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- Cash dividends declared per common share (Note 12) $ 0.63 $ 0.60 $ 0.55 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 18 Consolidated Statements of Stockholders' Equity Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data and Number of Shares) - ----------------------------------------------------------------------------------------------------------- Additional Net Common Paid-In Retained Unrealized Stock Capital Earnings Appreciation Total - ----------------------------------------------------------------------------------------------------------- Balances, December 31, 1994 $24,066 $12,049 $113,617 $20,921 $170,653 Net income - - 28,803 - 28,803 Cash dividend declared on common stock, $.55 per share - - (5,957) - (5,957) Change in net unrealized appreciation, net of applicable income taxes - - - 15,273 15,273 Three for two stock split (Note 12) 12,033 - (12,033) - - Purchase and retirement of 372 shares of common stock (1) (18) - - (19) - ----------------------------------------------------------------------------------------------------------- Balances, December 31, 1995 $36,098 $12,031 $124,430 $36,194 $208,753 Net income - - 21,960 - 21,960 Cash dividend declared on common stock, $.60 per share - - (6,457) - (6,457) Change in net unrealized appreciation, net of applicable income taxes - - - 6,631 6,631 Purchase and retirement of 101,958 shares of common stock (339) (2,689) - - (3,028) - ----------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 $35,759 $ 9,342 $139,933 $42,825 $227,859 Net income - - 28,732 - 28,732 Cash dividend declared on common stock, $.63 per share - - (6,759) - (6,759) Change in net unrealized appreciation, net of applicable income taxes - - - 27,388 27,388 Purchase and retirement of 390 shares of common stock (1) (11) - - (12) - ----------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 $35,758 $ 9,331 $161,906 $70,213 $277,208 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 19 Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities Net Income $ 28,732 $ 21,960 $ 28,803 - ------------------------------------------------------------------------------------------------------------ Adjustments to reconcile net income to net cash provided by operating activities Net bond discount accretion (307) (489) (1,244) Depreciation and amortization 1,117 2,104 1,229 Realized investment gains (2,610) (4,651) (1,698) Realized gain on sale of property - (2) - Changes in: Accrued investment income (1,964) (678) (1,106) Accounts receivable (627) (4,813) (4,756) Deferred policy acquisition costs (4,132) (3,413) (5,125) Reinsurance receivables (1,940) (1,793) 9,348 Prepaid reinsurance premiums 165 (577) (637) Income taxes receivable/payable 4,016 296 (1,831) Other assets (53) 23 231 Future policy benefits and losses, claims and settlement expenses 16,652 32,105 6,308 Unearned premiums 3,288 8,196 13,381 Accrued expenses and other liabilities (1,454) (3,640) 3,391 Employee benefit obligations 1,901 1,071 807 Deferred income taxes 427 (1,778) 2,232 - ------------------------------------------------------------------------------------------------------------ Total adjustments $ 14,479 $ 21,961 $ 20,530 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities $ 43,211 $ 43,921 $ 49,333 - ------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Proceeds from sale of available-for-sale investments $ 27,390 $ 35,251 $ 1,344 Proceeds from call and maturity of held-to-maturity investments 62,834 67,696 33,154 Proceeds from call and maturity of available-for-sale investments 5,298 10,562 3,313 Proceeds from sale of other investments 62,189 19,012 2,593 Purchase of investments held-to-maturity (89,519) (127,982) (108,582) Purchase of investments available-for-sale (105,408) (30,872) (3,793) Purchase of other investments (53,429) (28,149) (15,456) Proceeds from sale of property and equipment 1,942 735 2,133 Purchase of property and equipment (4,619) (1,961) (3,368) - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities $(93,322) $(55,708) $(88,662) - ------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Policyholders' account balances Deposits to investment and universal life type contracts $127,644 $ 96,890 $ 87,041 Withdrawals from investment and universal life type contracts (82,881) (68,212) (45,173) Purchase and retirement of common stock (12) (3,028) (19) Payment of cash dividends (6,651) (6,472) (5,777) - ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities $ 38,100 $ 19,178 $ 36,072 - ------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents $(12,011) $ 7,391 $ (3,257) Cash and Cash Equivalents at Beginning of Year 14,389 6,998 10,255 - ------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Year $ 2,378 $ 14,389 $ 6,998 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS, PRINCIPLES OF CONSOLIDATION AND BASIS OF REPORTING The Consolidated Financial Statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which differ in some respects from those followed in reports to insurance regulatory authorities. United Fire & Casualty Company and its insurance subsidiaries (the "Company") are engaged in the business of property and casualty insurance and life insurance. The Company and its property and casualty subsidiaries market most forms of commercial and personal property and casualty insurance products, including fidelity and surety bonds and reinsurance. The business is generated through approximately 1,700 independent agencies and brokers in 35 states, with 70% of the Company's direct premiums originating in six Midwestern states in 1997. United Life Insurance Company underwrites and markets ordinary life (primarily universal life), annuities (primarily single premium) and credit life products to individuals and groups through independent agencies. The accompanying Consolidated Financial Statements include United Fire & Casualty Company and its wholly owned subsidiaries, United Life Insurance Company, Lafayette Insurance Company, Insurance Brokers & Managers, Inc., Addison Insurance Company, Addison Insurance Agency and Crabtree Premium Finance Company. All material intercompany items have been eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts included in the Consolidated Financial Statements for prior years have been reclassified to conform with the 1997 financial statement presentation. Property and casualty operations Premiums are reflected in income on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of policies in force. Certain costs of underwriting new business, principally commissions, premium taxes and variable underwriting and policy issue expenses, have been deferred. Such costs are being amortized as premium revenue is recognized. The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, losses and expenses, and certain other costs expected to be incurred as the premium is earned. Unpaid losses and settlement expenses are based on estimates of reported and unreported claims and related settlement expenses. While management believes the reserve for claims and settlement expenses is adequate, the reserve is continually reviewed and as adjustments become necessary, they are reflected in current operations. Changes in assumptions used in estimating reserves could cause the reserves to change in the near term. Life operations On traditional business, premiums are reported as earned when due, and benefits and expenses are associated with premium income so as to result in the recognition of profits over the lives of the related contracts. On universal life and annuity (nontraditional) business, income and expenses are reported as charged and credited to policyholder account balances through the use of the retrospective deposit method. This method results in the recognition of profits over the lives of the related contracts. These associations are accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of life policy acquisition costs. 21 The costs of acquiring new life business, principally commissions and certain variable underwriting, agency and policy issue expenses, have been deferred and are being amortized to income over the premium paying period of the related traditional policies in proportion to the ratio of the expected annual premium revenue to the expected total premium revenue and over the anticipated lives of nontraditional policies in proportion to the ratio of the expected annual gross margins to the expected total gross margins. The expected premium revenue and gross margins are based upon the same mortality and withdrawal assumptions used in determining future policy benefits. Liabilities for future policy benefits are computed by the net level premium method using interest assumptions ranging from 4.5% to 8.0% and withdrawal, mortality and morbidity assumptions appropriate at the time the policies were issued. Health reserves are stated at amounts determined by estimates on individual cases and estimates of unreported claims based on past experience. Liabilities for universal life type and investment contracts are stated at policyholder account values before surrender charges. Liabilities for traditional immediate annuities are based primarily upon statutory reserves. Policy claim liabilities are determined using actuarial estimates. These estimates are based on historical information along with certain assumptions about future events. Changes in assumptions for such things as medical costs, environmental hazards, and legal actions, as well as changes in actual experience could cause these estimates to change in the near term. The Company expects to realize a spread of approximately 1.5% to 2.0% between interest earned and interest credited on its Universal Life Plans and deferred annuities, for which the liability is equal to total policy account values plus deferred front-end loads. Investments Investments in held-to-maturity fixed income securities are recorded at amortized cost. The Company has the ability and intent to hold these investments until maturity. If, however, a permanent impairment occurs in a security, the Company writes the security down to the new value. Available-for-sale fixed income securities, equity securities and other long-term investments are recorded at fair value. Mortgage loans are recorded at the unpaid balance amount. Policy loans and short-term investments are recorded at cost. Included in investments at December 31, 1997 and 1996 are securities on deposit with various regulatory authorities as required by law with carrying values of $543,801,000 and $481,703,000, respectively. Realized gains or losses on disposition of investments are included in the computation of net income. Cost of investments sold is determined by the specific identification method. Changes in unrealized appreciation and depreciation resulting from available-for-sale fixed income securities, equity securities and other long-term investments, are reported as direct increases or decreases in stockholders' equity, less applicable income taxes. Cash and cash equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and non-negotiable certificates of deposit with original maturities of three months or less. Income taxes paid during 1997, 1996 and 1995 were $5,789,000, $8,201,000, and $8,801,000, respectively. The Company received $2,074,000 in interest on Federal income taxes in 1996. There were no other significant payments of interest other than interest credited on policyholders' accounts in 1997, 1996 or 1995. Property, equipment and depreciation Property and equipment is carried at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the underlying assets. Amortization of intangibles Intangibles, including goodwill and agency relationships, are being amortized by the straight-line method over periods of up to twenty-eight years. 22 Income taxes The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are determined at the end of each period, based on differences between the financial statement bases of assets and liabilities and the tax bases of those same assets and liabilities, using the currently enacted statutory tax rates. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. Benefit Plans The Company has a defined benefit pension plan covering substantially all employees. Under the plan, retirement benefits are primarily a function of the number of years of service and the level of compensation. It is the Company's policy to fund the plan on a current basis to the extent deductible under existing tax regulations. The Company has a defined benefit postretirement health care plan that covers substantially all full-time employees. The plan pays stated percentages of most necessary medical and dental expenses incurred by retirees, after subtracting payments by Medicare or other providers and after a stated deductible has been met. Participants become eligible for the benefits if they retire from the Company after reaching age 55 with ten or more years of service in the plan. The plan is contributory, with retiree contributions adjusted annually. Accounting Changes The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" effective December, 1997. This standard supersedes APB Opinion No. 15 " Earnings Per Share" and simplifies the standards for computing and presenting earning per share ("EPS"). Under the new standard, the presentation of primary EPS has been replaced with a presentation of basic EPS. Basic EPS is computed excluding dilution caused by common stock equivalents such as stock options. The presentation of fully diluted EPS has been replaced with a presentation of diluted EPS, which is calculated in a similar fashion to how fully diluted EPS had been computed. This standard does not have a material effect on the Company's Consolidated Financial Statements. In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129, adopted by the Company effective December 31, 1997, contains disclosure requirements including liquidation preferences of preferred stock, rights and privileges of the outstanding equity securities and the redemption amounts for all issues of capital stocks that are redeemable. SFAS No. 129 does not have a material effect on the Company's Consolidated Financial Statements. The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", effective January 1, 1996. SFAS No. 121 requires the separation of long-lived assets and certain identifiable intangibles into two categories for purposes of accounting for an impairment of assets: those to be held and used and those to be disposed of. The Company has intangibles to be held and used from the purchase of Addison Insurance Company and the assumption of a book of business in 1990. SFAS No. 121 requires that intangibles to be held and used should be reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that its intangible assets are not impaired and has not written down their value. In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" governing the reporting and display of comprehensive income and its components which includes items previously recorded directly in equity, such as unrealized gains or losses on securities available-for-sale and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requiring that public businesses report financial and descriptive information about its reportable operating segments. SFAS No. 130 is effective for interim periods beginning after December 15, 1997 and SFAS No. 131 is effective for annual periods beginning after December 15, 1997 for the initial year of adoption and interim periods thereafter. The impact of adopting SFAS No. 130 and SFAS No. 131 will require additional disclosure in the Consolidated Financial Statements and is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", effective for fiscal years beginning after December 15, 1997. The new statement standardizes the disclosure requirements for these benefit plans and the impact is not expected to have a material effect on the Company's Consolidated Financial Statements or Notes to Consolidated Financial Statements. 23 NOTE 2. SUMMARY OF INVESTMENTS Approximately 22% of the fixed income portfolio is invested in collateralized mortgage obligations ("CMOs"), compared to 26% at December 31, 1996. The Company did not add to its mortgage-backed securities/CMO holdings during the last half of 1997. Returns were not as attractive as those found in other investment alternatives. The Company minimized its prepayment risk by buying most issues priced at a slight discount. While buying at a discount does not prevent prepayment, the yield is not penalized as is the case when a premium is paid. In addition, although the stated maturity is longer than the average life of the issues, the Company concentrated on buying issues with an expected maturity in the seven-to-twelve-year range. A reconciliation of the amortized cost to fair values of investments in held-to-maturity and available-for-sale fixed maturities, equity securities and other long-term investments as of December 31, 1997 and 1996 is as follows.
- ------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Type of Investment Cost Appreciation Depreciation Value - ------------------------------------------------------------------------------------------------------------- Held-to-maturity Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 27,058 $ 528 $ 48 $ 27,538 Mortgage-backed securities 19,270 1,826 1 21,095 All others 3,382 347 7 3,722 States, municipalities and political subdivisions 230,959 13,787 230 244,516 Foreign 6,827 370 -- 7,197 Public utilities 84,192 1,690 24 85,858 Corporate bonds Collateralized mortgage obligations 92,864 4,065 365 96,564 All other corporate bonds 212,808 10,994 425 223,377 - ------------------------------------------------------------------------------------------------------------- Total held-to-maturity $677,360 $ 33,607 $ 1,100 $709,867 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Available-for-sale Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 48,256 $ 1,666 $ 86 $ 49,836 Mortgage-backed securities 56 5 -- 61 All others 9,642 168 -- 9,810 States, municipalities and political subdivisions 26,360 536 1 26,895 All foreign bonds 4,046 -- 116 3,930 Public utilities 1,206 5 7 1,204 Corporate bonds Collateralized mortgage obligations 13,953 273 785 13,441 All other corporate bonds 41,500 706 451 41,755 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $145,019 $ 3,359 $ 1,446 $146,932 - ------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 3,525 $ 6,958 $ -- $ 10,483 Banks, trust and insurance companies 12,005 71,734 -- 83,739 All other common stocks 9,921 23,783 219 33,485 Nonredeemable preferred stocks 845 153 7 991 - ------------------------------------------------------------------------------------------------------------- Total equity securities $ 26,296 $102,628 $ 226 $128,698 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale $171,315 $105,987 $ 1,672 $275,630 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Other long-term investments $ 9,000 $ 3,454 $ 6 $ 12,448 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
24
- ---------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Type of Investment Cost Appreciation Depreciation Value - ---------------------------------------------------------------------------------------------------------- Held-to-maturity Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 27,552 $ 340 $ 849 $ 27,043 Mortgage-backed securities 22,780 1,938 2 24,716 All others 3,351 300 28 3,623 States, municipalities and political subdivisions 208,332 8,532 786 216,078 Foreign 6,842 199 45 6,996 Public utilities 79,793 381 1,077 79,097 Corporate bonds Collateralized mortgage obligations 97,757 2,963 762 99,958 All other corporate bonds 204,731 7,252 953 211,030 - ------------------------------------------------------------------------------------------------------------- Total held-to-maturity $651,138 $ 21,905 $ 4,502 $668,541 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Available-for-sale Fixed Maturities Bonds United States Government, government agencies and authorities Collateralized mortgage obligations $ 49,899 $ 667 $ 1,320 $ 49,246 Mortgage-backed securities 64 5 -- 69 All others 6,684 75 5 6,754 Public utilities 206 -- 10 196 Corporate bonds Collateralized mortgage obligations 11,848 87 928 11,007 All other corporate bonds 616 18 4 630 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale fixed maturities $ 69,317 $ 852 $ 2,267 $ 67,902 - ------------------------------------------------------------------------------------------------------------- Equity securities Common stocks Public utilities $ 3,525 $ 4,973 $ -- $ 8,498 Banks, trust and insurance companies 12,009 42,618 -- 54,627 All other common stocks 9,514 18,106 308 27,312 Nonredeemable preferred stocks 850 47 20 877 - ------------------------------------------------------------------------------------------------------------- Total equity securities $ 25,898 $ 65,744 $ 328 $ 91,314 - ------------------------------------------------------------------------------------------------------------- Total available-for-sale $ 95,215 $ 66,596 $ 2,595 $159,216 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Other long-term investments $ 8,395 $ 1,612 $ 37 $ 9,970 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
25 The amortized cost and fair value of held-to-maturity and available-for-sale fixed maturities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Held-to-maturity Available-for-sale - ------------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - ------------------------------------------------------------------------------------------------------- Due in one year or less $ 7,605 $ 7,666 $ 205 $ 207 Due after one year through five years 123,686 129,540 5,776 5,360 Due after five years through ten years 167,825 176,798 26,356 26,520 Due after ten years 239,052 250,666 50,417 51,507 Mortgage-backed securities 19,270 21,095 56 61 Collateralized mortgage obligations 119,922 124,102 62,209 63,277 - ------------------------------------------------------------------------------------------------------- $677,360 $709,867 $145,019 $146,932 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Proceeds from sales of available-for-sale investments during 1997, 1996 and 1995 were $27,390,000, $35,251,000, and $1,344,000, respectively. Gross gains of $3,242,000, $3,499,000, and $790,000, respectively, were realized on those sales. Gross losses of $15,000, $342,000 and zero, respectively, were realized on those sales in 1997, 1996 and 1995. A summary of realized investment gains (losses) resulting from sales, calls and maturities and net changes in unrealized investment appreciation (depreciation), less applicable income taxes, is as follows.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Realized investment gains (losses) Fixed maturities $ (401) $ 2,966 $ 692 Equity securities 3,011 1,843 791 Other investments -- (158) 215 - ------------------------------------------------------------------------------------------------------- $ 2,610 $ 4,651 $ 1,698 - ------------------------------------------------------------------------------------------------------- Net changes in unrealized investment appreciation Available-for-sale fixed maturities, equity securities and other long-term investments $ 42,187 $ 10,149 $ 23,496 Income taxes (14,799) (3,518) (8,223) - ------------------------------------------------------------------------------------------------------- $ 27,388 $ 6,631 $ 15,273 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Net changes in unrealized investment appreciation (depreciation), fixed maturities $ 18,432 $(16,483) $ 54,671 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
The net investment income for the years ended December 31, 1997, 1996 and 1995 is composed of the following.
- -------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Investment income Interest on fixed maturities $ 56,837 $ 53,459 $ 50,913 Dividends on equity securities 2,526 2,352 2,276 Interest on other long-term investments 3,228 1,819 1,075 Interest on mortgage loans 226 232 239 Interest on policy loans 616 571 530 Other 1,832 1,653 1,734 - -------------------------------------------------------------------------------- Total investment income $ 65,265 $ 60,086 $ 56,767 Less investment expenses 3,579 3,150 3,164 - -------------------------------------------------------------------------------- Net investment income $ 61,686 $ 56,936 $ 53,603 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
26 NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimated the fair value of its financial instruments, based on relevant market information or by discounting estimated future cash flows at estimated current market discount rates appropriate to the particular asset or liability shown. In most cases, quoted market prices were used in determining the fair value of fixed maturities, equity securities and short-term investments. Where quoted market prices were unavailable, the estimate was based on recent trading. Market values for collateralized mortgage obligations were provided by various data vendors. Other long-term investments, consisting primarily of holdings in limited partnership funds, are valued by the various fund managers. In management's opinion, these values reflect fair value at December 31, 1997 and 1996. The estimated fair value of mortgage loans was based on the estimated discounted future cash flows using 6.25% at December 31, 1997 and 6.5% at December 31, 1996. The book value of policy loans is considered to be fair value as the interest rate is fixed and in management's opinion the interest rates in the existing portfolio are comparable to current policy loan interest rates. For accrued investment income, carrying value is a reasonable estimate of fair value, due to its short-term nature. The fair value of the liabilities for annuity products which are in a benefit payment phase, guaranteed investment contracts and structured settlements are based on a discount rate of 6.25% at December 31, 1997 and 6.5% at December 31, 1996. The fair value of annuities currently in an accumulation phase is based on the net cash surrender value. A summary of the carrying value and estimated fair value of assets and liabilities meeting the definition of financial instruments at December 31, 1997 and 1996 is as follows.
- ------------------------------------------------------------------------------------------------------ (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------ At December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------ Fair Carrying Fair Carrying Assets Value Value Value Value - ------------------------------------------------------------------------------------------------------ Investments Held-to-maturity fixed maturities $ 709,867 $ 677,360 $668,541 $651,138 Available-for-sale fixed maturities 146,932 146,932 67,902 67,902 Equity securities 128,698 128,698 91,314 91,314 Mortgage loans 3,126 2,862 3,425 2,959 Policy loans 8,405 8,405 7,591 7,591 Other long-term investments 12,448 12,448 9,970 9,970 Short-term investments 19,195 19,195 29,330 29,330 Other Assets Accrued investment income 14,159 14,159 12,195 12,195 - ------------------------------------------------------------------------------------------------------ Liabilities - ------------------------------------------------------------------------------------------------------ Policy Reserves Annuity (Accumulations) $ 300,035 $ 313,118 $264,136 $273,419 Annuity (On-Benefits) 2,955 2,702 2,469 2,719 Structured settlements 450 702 240 411 Guaranteed investment contracts 1,914 1,920 1,638 2,111 - ------------------------------------------------------------------------------------------------------
NOTE 4. SHORT-TERM BORROWINGS The Company maintains a six-million dollar line of credit with a local bank. Under the terms of the agreement, interest on outstanding notes would be payable at the lender's then prevailing prime rate. During 1997, the Company borrowed $1,000,000 at 8.5% against the line of credit for 4 days. No funds were borrowed during 1996. 27 NOTE 5. REINSURANCE Property and Casualty Operations The property and casualty insurance companies cede portions of their insurance business to other insurance companies on both a pro rata and excess of loss basis. Insurance ceded by the property and casualty insurance companies does not relieve their primary liability as the originating insurers. Earned premiums ceded were $25,716,000, $27,106,000 and $26,053,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company believes all amounts are collectible with regard to reinsurance receivables. There are no concentrations of credit risk associated with reinsurance. The property and casualty insurance companies also assume portions of their insurance business from other insurance companies. Assumed premiums earned for the years ended December 31, 1997, 1996 and 1995 were $40,198,000, $38,545,000 and $33,014,000, respectively. Life Operations United Life Insurance Company follows the policy of reinsuring that portion of the risk in excess of $200,000 on the life of any individual. Policy benefit reserves and claims are stated after deduction of reserves and claims applicable to reinsurance ceded to other companies; however, United Life Insurance Company is contingently liable for these amounts in the event such companies are unable to pay their portion of the claims and is contingently liable for ceded insurance in force of $339,430,000, and $432,836,000 at December 31, 1997 and 1996, respectively. Approximately 61% of ceded life insurance in force has been ceded to two reinsurers. The Company believes all amounts are collectible with regard to reinsurance receivables. NOTE 6. LIABILITY FOR PROPERTY AND CASUALTY LOSSES AND SETTLEMENT EXPENSES The following table provides an analysis of losses and loss adjustment expenses ("LAE"), including a reconciliation of beginning and ending liability balances for 1997 and 1996.
- -------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------- At December 31, 1997 1996 - -------------------------------------------------------------------------------------------------------- Gross liability for losses and LAE at beginning of year $ 221,207 $198,403 Less reinsurance receivables 11,331 9,703 - -------------------------------------------------------------------------------------------------------- Net liability for losses and LAE at beginning of year $ 209,876 $188,700 Provision for losses and LAE for claims occurring in the current year 183,723 186,132 Decrease in estimated losses and LAE for claims occurring in prior years (33,544) (29,129) - -------------------------------------------------------------------------------------------------------- $ 360,055 $345,703 - -------------------------------------------------------------------------------------------------------- Losses and LAE payments for claims occurring during Current year $ 79,449 $ 79,209 Prior years 61,694 56,618 - -------------------------------------------------------------------------------------------------------- $ 141,143 $135,827 - -------------------------------------------------------------------------------------------------------- Net liability for losses and LAE at end of year $ 218,912 $209,876 Plus reinsurance receivables 12,856 11,331 - -------------------------------------------------------------------------------------------------------- Gross liability for losses and LAE at end of year $ 231,768 $221,207 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
The Consolidated Financial Statements include the estimated liability for unpaid losses and LAE of the property and casualty lines of business. The liabilities for losses and LAE are determined using case-basis evaluations and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred (both reported and not reported) through December 31 of each year. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, if any, are reflected in current operations. 28 In 1997, all lines of business contributed to the $33,544,000 decrease in estimated losses and LAE for claims occurring in prior years. In 1996 as well, the Company experienced favorable loss development. The lines of business contributing to this $29,129,000 redundancy included commercial multiple peril, other liability, personal auto liability and workers' compensation lines. The Company is not aware of any significant contingent liabilities as far as environmental issues are concerned. Because of the type of property coverage the Company writes, there exists the potential for exposure to environmental pollution and asbestos claims. The Company's underwriters are aware of these exposures and use limited riders or endorsements to limit exposure. NOTE 7. STATUTORY REPORTING, CAPITAL REQUIREMENTS AND DIVIDEND AND RETAINED EARNINGS RESTRICTIONS Statutory stockholders' surplus and net income at December 31, 1997, 1996 and 1995 and for the years then ended are as follows.
- -------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------- Statutory Statutory Stockholders' Net Income Surplus - -------------------------------------------------------------------------------- 1997 Property and casualty $231,326 $23,627 Life, accident and health 53,095 2,331 - -------------------------------------------------------------------------------- 1996 Property and casualty $177,263 $ 9,202 Life, accident and health 49,491 3,812 - -------------------------------------------------------------------------------- 1995 Property and casualty $158,055 $23,213 Life, accident and health 45,911 2,224 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The Company and its insurance subsidiaries prepare their statutory financial statements in conformity with practices prescribed or permitted by their state of domicile. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices are used when prescribed statutory practices do not address the accounting for transactions. The Company does not use permitted practices that individually or in the aggregate materially affect statutory surplus or risk-based capital. The State of Iowa Insurance Department imposes certain capital requirements on insurance companies on a statutory basis. Under the applicable regulations, the Company is required to maintain minimum capital stock of $2,500,000 and minimum additional paid-in capital and retained earnings in the aggregate amount of $2,500,000. At December 31, 1997, the Company's capital stock was $35,758,000 and total statutory paid-in capital and retained earnings were $195,568,000. The amount of dividends that may be paid to stockholders without prior approval by the State of Iowa Insurance Department is limited to the excess of statutory retained earnings over contributed surplus. Contributed surplus as of December 31, 1997, was $8,058,000. Based upon this restriction, the Company could make a maximum of $179,451,000 in dividend distributions to stockholders in 1998. Dividend payments by the insurance subsidiaries to the Company are subject to similar restrictions in the states in which they are domiciled. The Company received no dividends from its subsidiaries in 1997 or 1996. In addition, the insurance departments governing the Company and its subsidiaries have imposed risk-based capital ("RBC") requirements. The regulation is based on a model adopted by the NAIC. An RBC formula establishes capital requirements for insurance companies based on an individual company's major areas of risk, including assets, credit, underwriting and off-balance sheet risk. The results are used by the NAIC and state insurance departments to identify companies that merit regulatory attention or the initiation of regulatory action. At December 31, 1997 and 1996, the life and property and casualty segments had adjusted capital well in excess of the required capital levels. 29 NOTE 8. FEDERAL INCOME TAXES Federal income tax expense is composed of the following.
- -------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Current $9,009 $ 7,195 $7,015 Deferred 427 (1,778) 2,232 - -------------------------------------------------------------------------------- Total $9,436 $ 5,417 $9,247 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
A reconciliation of income tax expense computed at the applicable Federal tax rate of 35% in 1997, 1996 and 1995 to the amount recorded in the Consolidated Financial Statements is as follows.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Computed expected rate $13,359 $9,489 $13,318 Reduction for tax-exempt municipal bond interest income (4,686) (4,227) (4,057) Reduction of nontaxable dividend income (581) (534) (520) Other, net 1,344 689 506 - ------------------------------------------------------------------------------------------------------- Federal income taxes, as provided $9,436 $5,417 $ 9,247 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
The significant components of the net deferred tax liability at December 31, 1997 and 1996 are as follows.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- At December 31, 1997 1996 - ------------------------------------------------------------------------------------------------------- Deferred tax assets Financial statement reserves in excess of income tax reserves $19,301 $18,344 Unearned premium adjustment 6,769 6,606 Postretirement benefits other than pensions 1,579 1,279 Salvage and subrogation 671 646 Pension 1,240 1,065 Other 2,940 2,758 - ------------------------------------------------------------------------------------------------------- Gross deferred tax assets $32,500 $30,698 - ------------------------------------------------------------------------------------------------------- Deferred tax liabilities Deferred acquisition costs $18,669 $17,215 Net unrealized appreciation on investment securities 37,549 22,750 Depreciation on assets 1,139 1,198 Net bond discount accretion and premium amortization 1,595 1,378 Other 1,416 851 - ------------------------------------------------------------------------------------------------------- Gross deferred tax liability $60,368 $43,392 - ------------------------------------------------------------------------------------------------------- Net deferred tax liability $27,868 $12,694 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
30 NOTE 9. EMPLOYEE BENEFIT OBLIGATIONS As permitted by SFAS No. 87, "Employers' Accounting for Pensions", the Company uses September 30 as the date for measuring plan assets and liabilities in order to obtain information necessary for the preparation of the financial statements on a timely basis. The following table sets forth the funded status of the Company's qualified pension plan and amounts recognized in the Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated obligation at September 30, 1997, 1996 and 1995 Vested benefit obligation $(16,635) $(14,301) $(10,697) - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $(17,114) $(14,713) $(11,122) - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Projected benefit obligation $(20,902) $(18,299) $(14,307) Plan assets at fair value at September 30, 1997, 1996 and 1995 16,565 15,045 13,318 - ------------------------------------------------------------------------------------------------------- Plan assets less than projected benefit obligation at September 30, 1997, 1996 and 1995 $ (4,337) $ (3,254) $ (989) Unrecognized net asset (established January 1, 1987) (90) (137) (185) Unrecognized prior service cost 1,132 1,229 4 Unrecognized net loss (858) (911) (1,598) - ------------------------------------------------------------------------------------------------------- Pension liability $ (4,153) $ (3,073) $ (2,768) - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Net pension cost includes the following components Service cost-benefits earned during the period $ 805 $ 655 $ 505 Interest cost on projected benefit obligations 1,410 1,051 806 Actual return on plan assets (2,136) (1,753) (2,165) Net amortization and deferral 1,001 640 1,102 - ------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,080 $ 593 $ 248 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Effective November 1, 1996, the pension plan was amended and the changes resulted in an increase to the Company's pension liability. The normal retirement benefit was changed from 1.25% of average monthly compensation times years of benefit service to 1.25% of average monthly compensation plus .5% of average monthly compensation in excess of the covered compensation limit all multiplied by years of benefit service. Years of benefit service was changed from a cap of 32 years to 35 years. Early retirement eligibility was change from age 59 1/2 to age 55 with five years of service. Early retirement benefits were previously reduced actuarially for all retirees. Now, early retirement benefits have a subsidized reduction if the employee retires with 20 years of service. The weighted average discount rate used in determining the actuarial present value of projected benefit obligation was 7.0% at September 30, 1997, 7.5% at September 30, 1996, and 7.0% at September 30, 1995. The rate of increase in future compensation levels was 4.0% at September 30, 1997, 4.5% at September 30, 1996 and 4.0% at September 30, 1995. The expected long-term rate of return on plan assets was 8.0% at September 30, 1997, 1996 and 1995. The Company has a profit sharing plan in which employees who meet service requirements are eligible to participate. The amount of the Company's contribution is discretionary and is determined annually but cannot exceed the amount deductible for Federal income tax purposes. The Company's contribution to the plan for the years ended December 31, 1997, 1996 and 1995 was $936,000, $717,000 and $1,561,000, respectively. 31 The Company also has an Employee Stock Ownership Plan for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the plan upon completion of one year of service and attaining age twenty-one. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in cash which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 1997, 1996 and 1995, the Trustee owned 93,127, 92,806 and 86,712 shares of Company stock, respectively. The Company did not make a contribution to the plan in 1997. In 1996 and 1995, the Company made a contribution to the plan of $142,000 and zero, respectively. The following table reconciles the accrued postretirement benefit obligation and amounts recognized in the Consolidated Financial Statements.
- --------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------- At December 31, 1997 1996 - --------------------------------------------------------------------- Accumulated Postretirement Benefit Obligation Retirees $(1,800) $(1,831) Other fully eligible participants (737) (901) Other active participants (3,510) (2,899) - --------------------------------------------------------------------- (6,047) (5,631) Unrecognized prior service cost 166 206 Unrecognized actuarial loss 1,369 1,734 - --------------------------------------------------------------------- Accrued postretirement benefit liability $(4,512) $(3,691) - --------------------------------------------------------------------- - ---------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - -------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Service cost-benefits attributed to service during the year $338 $356 $239 Interest cost on accumulated postretirement benefit obligation 421 342 286 Amortization of prior service cost 40 40 40 Amortization of actuarial loss 58 132 45 - -------------------------------------------------------------------------------------------------------- Net postretirement benefit expense $857 $870 $610 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
The unrecognized prior service cost and actuarial loss are being amortized on a straight-line basis over an average period of eight years. This period represents the average remaining employee service period until the date of full eligibility. For medical claims, a health care cost trend rate of 9.0% was assumed for 1997, decreasing annually to 5.5% in 2003. For dental claims, a health care cost trend rate of 6.5% was assumed for 1997, decreasing annually to 5.0% in 2003. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $1,210,000 and the aggregate of the service and interest cost components of net postretirement benefit expense for the year then ended by $173,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 7.5% as of December 31, 1997 and 1996, respectively. 32 NOTE 10. OPERATIONS IN DIFFERENT INDUSTRIES The Company conducts its operations principally in two industries, property and casualty insurance and life insurance. Total revenue by industry includes sales to both outside customers and intersegment sales which are eliminated to arrive at the total revenues as reported in the Company's Consolidated Statements of Operations. Intersegment sales are accounted for on the same basis as sales to outside customers. The following table sets forth certain data for each of the Company's business segments.
- ------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Property and casualty insurance Net premiums earned $225,822 $215,470 $185,994 Loss and loss adjustment expenses 149,536 155,820 118,231 Underwriting and acquisition expenses 74,992 73,371 61,091 - ------------------------------------------------------------------------------------------------------- Underwriting income (loss) $ 1,294 $(13,721) $ 6,672 Investment income, net 23,007 21,349 21,009 Realized investment gains and other income 2,456 5,365 1,174 Commission and policy fee income 1,877 1,904 1,863 - -------------------------------------------------------------------------------------------------------- Operating earnings $ 28,634 $ 14,897 $ 30,718 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Assets $561,599 $496,808 $453,854 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Life insurance Net premiums earned $ 19,231 $ 19,435 $ 21,639 Investment income, net 38,823 35,720 32,609 Realized investment gains and other income 220 1,361 524 - ------------------------------------------------------------------------------------------------------- Total revenues $ 58,274 $ 56,516 $ 54,772 Benefits, underwriting and acquisition expenses 48,740 44,036 47,440 - ------------------------------------------------------------------------------------------------------- Operating earnings $ 9,534 $ 12,480 $ 7,332 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Assets $596,323 $528,027 $483,740 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Premium revenue between segments $ 114 $ 108 $ 105 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
Depreciation expense and property and equipment acquisitions for the years ended December 31, 1997, 1996 and 1995, are reflected in the property and casualty insurance segment. NOTE 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth selected quarterly financial information of the Company.
- -------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - -------------------------------------------------------------------------------------------------------- Quarters First Second Third Fourth Total - -------------------------------------------------------------------------------------------------------- Fiscal year ended December 31, 1997 Total revenues $75,430 $76,109 $77,977 $81,614 $311,130 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Net income $ 7,403 $ 5,118 $ 3,591 $12,620 $ 28,732 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Earnings per common share $ 0.69 $ 0.48 $ 0.33 $ 1.18 $ 2.68 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Fiscal year ended December 31, 1996 Total revenues $74,101 $71,592 $76,316 $78,265 $300,274 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Net income $ 8,755 $ 5,161 $ 1,299 $ 6,745 $ 21,960 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Earnings per common share $ 0.81 $ 0.48 $ 0.12 $ 0.63 $ 2.04 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
NOTE 12. EARNINGS AND DIVIDENDS PER COMMON SHARE The Company declared a three for two stock split in the form of a 50% stock dividend to stockholders of record as of December 18, 1995. Cash dividends per common share of $.63 and $.60 were declared in 1997 and 1996, respectively. Earnings per common share, weighted average common shares outstanding and cash dividends declared per common share have been retroactively restated for all periods presented. 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF UNITED FIRE & CASUALTY COMPANY: We have audited the accompanying consolidated balance sheets of United Fire & Casualty Company (an Iowa corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of United Fire & Casualty Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary data (Schedule III - --Supplementary insurance information, Schedule IV--Reinsurance, and Schedule VI--Supplemental information concerning property and casualty insurance operations) are presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Chicago, Illinois February 19, 1998 34 INDEX TO SUPPLEMENTARY SCHEDULES Consolidated Schedules III -- Supplementary insurance information 36 IV -- Reinsurance 37 VI -- Supplemental information concerning property and casualty insurance 38 operations
All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Consolidated Financial Statements. 35 SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Future Policy Benefits, Deferred Losses, Policy Claims Earned Realized Net Acquisition and Loss Unearned Premium Investment Investment Costs Expenses Premiums Revenue Gains Income - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Property and casualty $18,235 $231,768 $100,769 $225,822 $2,456 $22,863 Life, accident and health 41,980 482,437 7,527 19,117 220 38,823 - ----------------------------------------------------------------------------------------------------------------------------------- Total $60,215 $714,205 $108,296 $244,939 $2,676 $61,686 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------- Benefits, Amortization Claims, of Deferred Other Interest on Losses and Policy Under- Policy- Settlement Acquisition writing holders' Premiums Expenses Costs Expenses Accounts Written - ------------------------------------------------------------------------------------------------------------------- December 31, 1997 Property and casualty $149,536 $43,060 $31,758 $ -- $226,915 Life, accident and health 14,679 9,320 2,099 22,510 21,841(1) - ------------------------------------------------------------------------------------------------------------------- Total $164,215 $52,380 $33,857 $22,510 $248,756 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
(1) Accident and health insurance premiums written.
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Future Policy Benefits, Deferred Losses, Policy Claims Earned Realized Net Acquisition and Loss Unearned Premium Investment Investment Costs Expenses Premiums Revenue Gains Income - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Property and casualty $18,376 $221,207 $ 99,840 $215,470 $5,365 $21,216 Life, accident and health 37,707 431,582 5,168 19,327 1,361 35,720 - ----------------------------------------------------------------------------------------------------------------------------------- Total $56,083 $652,789 $105,008 $234,797 $6,726 $56,936 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------- Benefits, Amortization Claims, of Deferred Losses and Policy Under- Policy- Settlement Acquisition writing holders' Premiums Expenses Costs Expenses Accounts Written - ------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Property and casualty $155,820 $43,912 $29,249 $ -- $221,934 Life, accident and health 14,290 4,452 4,473 20,701 20,305(1) - ------------------------------------------------------------------------------------------------------------------- Total $170,110 $48,364 $33,722 $20,701 $242,239 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
(1) Accident and health insurance premiums written.
- ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Future Policy Benefits, Deferred Losses, Policy Claims Earned Realized Net Acquisition and Loss Unearned Premium Investment Investment Costs Expenses Premiums Revenue Gains Income - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 Property and casualty $19,266 $203,702 $92,798 $185,994 $1,174 $20,994 Life, accident and health 33,404 393,603 4,014 21,534 524 32,609 - ----------------------------------------------------------------------------------------------------------------------------------- Total $52,670 $597,305 $96,812 $207,528 $1,698 $53,603 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------- Benefits, Amortization Claims, of Deferred Losses and Policy Under- Policy- Settlement Acquisition writing holders' Premiums Expenses Costs Expenses Accounts Written - ------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 Property and casualty $118,231 $39,208 $21,775 $ -- $197,546 Life, accident and health 15,012 5,349 6,437 20,528 22,072(1) - ------------------------------------------------------------------------------------------------------------------- Total $133,243 $44,557 $28,212 $20,528 $219,618 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
(1) Accident and health insurance premiums written. Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1997 financial statement presentation. 36 SCHEDULE IV. REINSURANCE
- --------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------- Percentage Gross Ceded to Assumed Net of Amount Amount Other From Other Amount Assumed to Earned Companies Companies Earned Net Earned - --------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Life insurance in force $3,403,207 $339,430 $ -- $3,063,777 0.0% Premiums: Property and casualty $ 211,340 $ 25,716 $ 40,198 $ 225,822 17.80% Life insurance 17,399 950 -- 16,449 0.00% Accident and health insurance 2,963 181 -- 2,668 0.00% - --------------------------------------------------------------------------------------------------- Total $ 231,702 $ 26,847 $ 40,198 $ 244,939 16.40% - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Life insurance in force $3,230,213 $432,836 $ -- $2,797,377 0.0% Premiums: Property and casualty $ 204,031 $ 27,106 $ 38,545 $ 215,470 17.89% Life insurance 18,338 1,059 -- 17,279 0.00% Accident and health insurance 2,237 189 -- 2,048 0.00% - --------------------------------------------------------------------------------------------------- Total $ 224,606 $ 28,354 $ 38,545 $ 234,797 16.42% - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 Life insurance in force $3,133,052 $455,422 $ -- $2,677,630 0.0% Premiums: Property and casualty $ 179,033 $ 26,053 $ 33,014 $ 185,994 17.75% Life insurance 20,881 1,066 -- 19,815 0.00% Accident and health insurance 1,915 196 -- 1,719 0.00% - --------------------------------------------------------------------------------------------------- Total $ 201,829 $ 27,315 $ 33,014 $ 207,528 15.91% - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1997 financial statement presentation. 37 SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Reserves for Unpaid Affiliation with Registrant: Deferred claims and Company and Policy Claim Realized Net consolidated property and Acquisition Adjustment Unearned Earned Investment Investment casualty subsidiaries Costs Expenses Premiums Premiums Gains Income - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 $18,235 $231,768 $100,769 $225,822 $2,456 $22,863 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 $18,376 $221,207 $ 99,840 $215,470 $5,365 $21,216 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 $19,266 $198,403 $ 96,812 $185,994 $1,174 $20,994 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Claims and Claim Affiliation with Registrant Adjustment Expenses Company and Incurred Related to Amortization ------------------------- of Deferred Paid Claims consolidated property and (1) (2) Policy and Claim casualty subsidiaries Current Prior Acquisition Adjustment Premiums Year Years Costs Expenses Written - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 $183,723 $(33,544) $43,060 $141,143 $226,915 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 $186,132 $(29,129) $43,912 $135,827 $221,934 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 $138,109 $(19,877) $41,814 $110,185 $197,546 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Certain amounts included in this schedule for earlier years have been reclassified to conform with the 1997 financial statement presentation. 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Company:
Name (Age) Present Position, Name and Principal Business of Director - ---------- ----------------------------------------------------------------------------- Scott McIntyre Jr.(64) Chairman of the Board, United Fire & Casualty Company Robert J. Bevenour (69) Retired James T. Brophy (70) Private investor Christopher R. Drahozal (36) Associate Professor of Law, University of Kansas School of Law Jack B. Evans (49) President, Hall-Perrine Foundation and Vice Chairman of the Board, United Fire & Casualty Company Roy L. Ewen (75) Retired Casey D. Mahon (46) Attorney at law; Adjunct Professor of Law, University of Iowa Leonard J. Marshall (68) Retired Thomas K. Marshall (64) Retired Byron G. Riley (67) Attorney, Firm of Bradley & Riley, P.C.
Executive Officers of the Company:
Name (Age) Office Held (Tenure in Years) - ---------- ----------------------------------------------------------------------------- Scott McIntyre Jr. (64) Chairman of the Board, General Manager (31) and Director (41) John A. Rife (55) President of the Company since May, 1997, President of United Life Insurance Company (13), employed by the Company for the past 21 years Kent G. Baker (54) Vice President and Chief Financial Officer (13) John R. Cruise (56) Vice President, Reinsurance (11) E. Dean Fick (53) Vice President, Claims (6), employed by Grinnell Mutual Reinsurance Company 24 years prior, serving as Senior Vice President, Claims (1987-1991) Shona Frese (53) Corporate Secretary, employed by the Company for the past 31 years David L. Hellen (45) Vice President, Denver Branch Office (10) Wilburn J. Hollis (57) Vice President, Human Resources (1), Director of Human Resources at Norwest Financial in Des Moines, Iowa from 1989 to 1996. E. Addison Hulit (58) Vice President, Lombard Branch Office (2), employed by the Company for the past 5 years, employed by Transamerica Insurance from 1991 to 1993; and Traveler's Insurance for the 21 years prior Robert B. Kenward (55) Vice President, Information Services (5), employed by the Company for the past 19 years Kevin L. Kubik (43) Vice President and Chief Investment Officer since June, 1997, employed by Van Kampen American Capital Investment Advisory Inc. from 1989 to 1997; AEGON/USA Investment Management from 1986 to 1989 and Modern Woodmen of American from 1977 to 1986. David A. Lange (40) Corporate Secretary, Fidelity and Surety claim manager since 1987, employed by Allied Group Insurance Co. from 1985 to 1987, Iowa National Mutual from April, 1985 to October, 1985, employed by the company from 1981 to 1985 Gerald D. Seidl (64) General Counsel (29) Richard B. Swain (40) Vice President, Lincoln Branch Office (1), employed by the Company for the past 4 years, employed by the Allied Group for the 14 years prior Galen E. Underwood (57) Treasurer (19) Stanley A. Wiebold (53) Vice President, Underwriting (12)
39 Directors of Subsidiary Companies: United Life Insurance Company Addison Insurance Company Insurance Brokers & Managers, Inc. C. Richard Ekstrand James T. Brophy Kent G. Baker Scott McIntyre Jr. E. Addison Hulit Carlyn K. Lewis John A. Rife Scott McIntyre Jr. Scott McIntyre Jr. Byron G. Riley Linda J. Pearson John A. Rife Gerald D. Seidl John A. Rife Gerald D. Seidl Lafayette Insurance Company Crabtree Premium Finance Company Carlyn K. Lewis E. Addison Hulit Scott McIntyre Jr. Scott McIntyre Jr. John A. Rife John A. Rife Gerald D. Seidl Leo F. Wegmann Jr.
Officers of the Company: United Fire & Casualty Company Chairman Secretaries Scott McIntyre Jr. Shona Frese David A. Lange President John A. Rife Assistant Secretaries Lucretia L. Canning General Counsel Donna M. Fugate Gerald D. Seidl Treasurer Vice Presidents Galen E. Underwood Kent G. Baker John R. Cruise Assistant Vice Presidents E. Dean Fick John T. Anderson Jr. David L. Hellen Jeffrey A. Chapin Wilburn J. Hollis Robert J. DeCamp E. Addison Hulit Dayton E. Roberts Robert B. Kenward Allen R. Sorensen Kevin L. Kubik Richard B. Swain Stanley A. Wiebold
Officers of Subsidiary Companies: United Life Insurance Company Lafayette Insurance Company Addison Insurance Company Chairman Chairman Chairman Scott McIntyre Jr. Scott McIntyre Jr. Scott McIntyre Jr. President President President John A. Rife Carlyn K. Lewis E. Addison Hulit Vice Presidents Secretary Vice Presidents Ronald D. Brandt Leo F. Wegmann Jr. Robert A. Andretich Rickey L. Pettyjohn Russell P. Shulfer Treasurer Secretary Kent G. Baker Secretary Jean N. Newlin Schnake Linda J. Pearson Executive Vice President and Treasurer Treasurer Samuel E. Hague Kent G. Baker
40 Crabtree Premium Finance Company Insurance Brokers & Managers, Inc. Chairman and President Chairman Scott McIntyre Jr. Scott McIntyre Jr. Vice President President Theresa J. McArthur Carlyn K. Lewis Secretary Secretary Christine Prete Betty S. Castro Treasurer Treasurer Kent G. Baker Kent G. Baker
ITEM 11. EXECUTIVE COMPENSATION Executive Compensation includes the amount expensed for financial reporting purposes under the Company's qualified profit sharing (401(k)) plan. All employees of the Company are eligible to participate after they have completed six months of service with the Company and have attained twenty-one years of age. The plan is not integrated with social security, and provides for employer contributions in such amounts as the Board of Directors may annually determine. The benefit payable under the plan is equal to the vested account balance. Executive Compensation includes the amounts expensed for financial reporting purposes as contributions to the Company's pension plan for the named individuals. The pension plan is a noncontributory plan which is integrated with social security. All employees of the Company are eligible to participate after they have completed one year of service, attained twenty-one years of age and have met hourly requirements with the Company. In 1995 through October, 1996, the normal retirement pension payable under the plan was based on the employee's highest average monthly earnings for five (5) consecutive years of employment, and provided a benefit of 1.25% of average annual wages times years of service with a maximum of 32 years. Effective November 1, 1996, the pension plan was amended. The normal retirement benefit was changed from 1.25% of average monthly compensation times years of benefit service to 1.25% of average monthly compensation plus .5% of average monthly compensation in excess of the covered compensation limit all multiplied by years of benefit service. Years of benefit service was changed from a cap of 32 years to 35 years. Early retirement eligibility was changed from age 59 1/2 to age 55 with five years of service. Early retirement benefits were previously reduced actuarially for all retirees. Now, early retirement benefits have a subsidized reduction if the employee retires with 20 years of service. The pension plan owned 101,030 shares of the Company common stock as of December 31, 1997, and has made deposits with United Life Insurance Company to be used by the plan to purchase retirement annuities from that company. The annuity fund maintained by United Life Insurance Company is credited with compound interest on the average fund balance for the year. The interest rate will be equivalent to the ratio of net investment income to mean assets of United Life Insurance Company. In 1983, the Company adopted the United Lafayette Employee Stock Ownership Plan. Effective January 1, 1988, the Plan was amended to convert the Tax Credit Employee Stock Ownership Plan to an Employee Stock Ownership Plan. The Plan is for the benefit of eligible employees and their beneficiaries. All employees are eligible to participate in the Plan upon completion of one year of service, attaining age twenty-one and have met hourly requirements with the Company. Contributions to this plan are made at the discretion of the Board of Directors. These contributions are based upon a percentage of total payroll and are allocated to participants on the basis of compensation. Contributions are made in cash which is used by the Trustee to acquire shares of the Company stock to allocate to participants' accounts. As of December 31, 1997, 1996 and 1995, the Trustee owned 93,127, 92,806 and 86,712 shares of Company common stock, respectively. The Company did not make a contribution to the plan in 1997. In 1996 and 1995, the Company made a contribution to the plan of $142,000 and zero, respectively. 41 The following table summarizes the compensation of the Company's Chairman and the four most highly compensated executive officers for the last three years. SUMMARY COMPENSATION TABLE (1) Annual Compensation
- ------------------------------------------------------------------------------------------------------- Name Principal Position Year Salary Bonus - ------------------------------------------------------------------------------------------------------- Scott McIntyre Jr. Chairman 1997 290,000 (2) (3) Scott McIntyre Jr. Chairman, President, CEO 1996 270,000 (2) 54,000 (3) Scott McIntyre Jr. Chairman, CEO 1995 250,000 (2) 75,000 (3) - ------------------------------------------------------------------------------------------------------- John A. Rife President, United Fire & Casualty 1997 166,667 (4) (4) Company John A. Rife President, United Life Insurance Company 1996 145,000 (4) 21,750 (4) John A. Rife President, United Life Insurance Company 1995 135,000 (4) 13,500 (4) - ------------------------------------------------------------------------------------------------------- E. Dean Fick Vice President, Claims 1997 131,250 (7) E. Dean Fick Vice President, Claims 1996 120,000 9,000 (5) E. Dean Fick Vice President, Claims 1995 109,500 17,520 (5) - ------------------------------------------------------------------------------------------------------- E. Addison Hulit Vice President 1997 105,000 (7) E. Addison Hulit Vice President 1996 87,333 16,300 (6) E. Addison Hulit Vice President 1995 76,500 9,180 (5) - ------------------------------------------------------------------------------------------------------- Kent G. Baker Vice President and Chief Financial 1997 95,000 (7) Officer Kent G. Baker Vice President and Chief Financial 1996 90,000 6,750 (5) Officer Kent G. Baker Vice President and Chief Financial 1995 85,000 13,600 (5) Officer - -------------------------------------------------------------------------------------------------------
Footnotes to summary compensation table: (1) Pursuant to SEC rules, the column "Other Annual Compensation" was omitted because, in all cases, the amounts were less than the minimum required to be reported. (2) Fixed by Compensation Committee in February of each year. Present salary was fixed at February, 1998 meeting. (3) Bonus, if any, determined at the regular meeting of the Directors in February of each year based on prior year performance. Current bonus will be paid on or about April 1, 1998. (4) Determined by Chairman. Salary is determined in December of each year and will be reviewed annually in December. Current bonus will be paid on or about April 1, 1998. (5) Determined by the bonus plan in effect for all salaried employees based on the performance for the preceding year. (6) One-time promotion bonus. (7) Calculated and paid on or about April 1, 1998. PENSION PLAN TABLE
- ------------------------------------------------------------------------------- Years of Service - ------------------------------------------------------------------------------- Salary 15 20 25 30 35 - ------------------------------------------------------------------------------- 100,000 24,052 32,069 40,086 48,103 56,121 131,250 32,255 43,006 53,758 64,510 75,261 150,000 37,177 49,669 61,961 74,353 86,746 160,000 39,802 53,069 68,336 79,603 92,871 - --------------------------------------------------------------------------------
The pension plan provides a benefit of 1.25% of average annual wages, plus .5% of average annual wages in excess of covered compensation, all times years of service (maximum 35 years). Wages are limited to $160,000 for pension plan purposes by the IRS. Pension figures for Scott McIntyre, Jr., Chairman and John A. Rife, President are based on $160,000 annual salary. Bonuses paid to officers are not included in pensionable wages. Director Compensation Non-employee directors are paid a fee of $500 per meeting attended, plus direct expenses, for attendance at director's meetings. When there is a committee meeting, the director serving on that committee receives an additional $400. An annual retainer of $2,500 is paid to each non-employee director with the exception of the Vice Chairman who receives an annual retainer of $10,000. 42 The following graph compares the cumulative total stockholder return on Common Stock for the last five fiscal years with the cumulative total return of the S&P 500 Index and S&P Property-Casualty Insurance Index, assuming an investment of $100 in each of the above at their closing prices on December 31, 1992 and reinvestment of dividends. TOTAL SHAREHOLDER RETURNS [PERFORMANCE GRAPH APPEARS HERE]
INDEXED RETURNS YEARS ENDING Company/Index Dec92 Dec93 Dec94 Dec95 Dec96 Dec97 UNITED FIRE & CAS CO 100 100.15 109.58 170.68 218.71 279.27 S&P Property-Casualty Insurance 100 98.23 103.04 139.51 169.53 246.60 S&P 500 Index 100 110.08 111.53 153.45 188.68 251.63
43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners. The following table sets forth information as of March 2, 1998, with respect to ownership of the Company's $3.33 1/3 par value common stock by principal security holders. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
- ----------------------------------------------------------------------------------------------------- Amount and Nature Percent of Beneficial of Name of Beneficial Owner Address of Beneficial Owner Ownership Class(1) - ----------------------------------------------------------------------------------------------------- Scott McIntyre, Jr. (1) Cedar Rapids, Iowa 1,547,118 14.44% Mildred R. McIntyre (1) Cedar Rapids, Iowa 1,167,746 10.90% General Accident Corporation of America Philadelphia, Pennsylvania 2,650,680 24.75% Susan M. Carlton (1) Orchard Park, New York 366,051 3.42% Margaret Pless (1) Durham, North Carolina 330,120 3.08% - -----------------------------------------------------------------------------------------------------
(1) Scott McIntyre Jr., Mildred R. McIntyre, Susan M. Carlton and Margaret Pless are all members of the same family. Included in the number of shares owned by Scott McIntyre, Jr. are 371,812 shares which he owns in his capacity as trustee of three trusts, one of which his children are the beneficiaries, one of which his wife is the beneficiary, and the other of which all of Mildred R. McIntyre's grandchildren are the beneficiaries. Included in the number of shares owned by Mildred R. McIntyre are 533,245 shares which she owns in her capacity as trustee of a trust in which she also has a life interest, and in which Scott McIntyre Jr., Susan M. Carlton and Margaret Pless each have an equal interest in the remainder. (b) Security ownership of management. The following table sets forth information as of March 2, 1998, with respect to ownership of the Company's $3.33 1/3 par value common stock by management. Except as otherwise indicated, each of the persons named below has sole voting and investment powers with respect to the shares indicated.
- -------------------------------------------------------------------------------- Percent Amount and Nature of Name of Beneficial Owner of Beneficial Ownership Class (1) - -------------------------------------------------------------------------------- Scott McIntyre, Jr. (1) 1,547,118 14.44% Roy L. Ewen 79,601 0.74% Robert J. Bevenour 3,500 0.03% Byron G. Riley, Jr 2,906 0.03% James T. Brophy 11,500 0.11% Thomas K. Marshall 2,202 0.02% Leonard J. Marshall 1,000 0.01% Casey D. Mahon 2,000 0.02% Jack B. Evans 4,134 0.04% Christopher R. Drahozal 106,579 1.00% 30 officers and directors as a group 1,773,890 16.56% - --------------------------------------------------------------------------------
(1) Included in the number of shares owned by Scott McIntyre Jr., are 121,500 shares held in the name of J. Scott McIntyre, Trustee of the Mildred Reynolds McIntyre Trust, 225,000 shares held in the name of Scott McIntyre Jr., or successor, Dee Ann McIntyre Trust, 25,312 shares held in the name of Scott McIntyre Jr., Irrevocable Trust and 9,200 shares held by the McIntyre Foundation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page ---- (a) 1. and 2. Financial Statements and Supplementary Data 17 (a) 3. Exhibits 3 (i) Articles of Incorporation of United Fire & Casualty Company, incorporated by reference from Registrant's Form S-8 Registration Statement, filed with the Commission on December 19, 1997. 3 (ii) By Laws of United Fire & Casualty Company, as amended, incorporated by reference from the Registrant's form S-8 Registration Statement, filed with the Commission on December 19, 1997. 11 Computation of Earnings Per Share 21 Subsidiaries of the Registrant 27 Financial Data Schedule 28 Information from reports furnished to State Insurance Regulatory Authorities (Filed by paper) (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report
45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED FIRE & CASUALTY COMPANY By /s/ John A. Rife ----------------------------------------------------------- John A. Rife, President Date 3/26/98 ---------------------------------------------------------- By /s/ Kent G. Baker ------------------------------------------------------------ Kent G. Baker, Vice-President, Principal Accounting Officer and Chief Financial Officer Date 3/26/98 ----------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ Scott McIntyre By /s/ Roy L. Ewen ----------------------------------------- ------------------------ Scott McIntyre Jr., Chairman and Director Roy L. Ewen, Director Date 3/26/98 Date 3/26/98 ----------------------------------------- ------------------------ By /s/ James T. Brophy By /s/ Casey D. Mahon ----------------------------------------- ------------------------ James T. Brophy, Director Casey D. Mahon, Director Date 3/26/98 Date 3/26/98 ----------------------------------------- ------------------------ By /s/ Robert J. Bevenour By /s/ Leonard J. Marshall ----------------------------------------- ------------------------ Robert J. Bevenour, Director Leonard J. Marshall, Director Date 3/26/98 Date 3/26/98 ----------------------------------------- ------------------------ By /s/ Christopher R. Drahozal By /s/ Thomas K. Marshall ----------------------------------------- ------------------------ Christopher R. Drahozal, Director Thomas K. Marshall, Director Date 3/26/98 Date 3/26/98 ----------------------------------------- ------------------------ By /s/ Jack B. Evans By /s/ Byron G. Riley ----------------------------------------- ------------------------ Jack B. Evans, Vice Chairman and Director Byron G. Riley, Director Date 3/26/98 Date 3/26/98 ----------------------------------------- ------------------------ 46 Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act (1) Four copies of the annual stockholders report for the year ended December 31, 1997 will be furnished to the Securities Exchange Commission by April 1, 1998. (2) Proxy statements will be furnished to security holders subsequent to the filing of the 10-K. Four copies of the proxy statement will be furnished to the Securities Exchange Commission when they are mailed to security holders. 47 EX-11 2 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) - -------------------------------------------------------------------------------- Weighted Average Earnings Number of Shares Net Per Years Ended December 31 Outstanding Income Common Share - -------------------------------------------------------------------------------- 1997 10,727,440 $ 28,732 $ 2.68 1996 10,773,591 21,960 2.04 1995 10,829,606 28,803 2.66 - --------------------------------------------------------------------------------
Computation of weighted average number of common and common equivalent shares:
- ------------------------------------------------------------------------------------------------------- Years Ended December 31 - ------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Common shares outstanding beginning of the period 10,727,712 10,829,461 10,829,706 Weighted average of the common shares purchased and retired or reissued (272) (55,870) (100) - ------------------------------------------------------------------------------------------------------- Weighted average number of common shares 10,727,440 10,773,591 10,829,606 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Earnings per common share, common shares outstanding and weighted average common shares outstanding have been retroactively restated for additional shares issued as a result of a three for two stock split to stockholders of record as of December 18, 1995. EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT United Life Insurance Company is an Iowa Corporation. Lafayette Insurance Company is a Louisiana Corporation. Addison Insurance Company is an Illinois Corporation. The Registrant owns 100% of the voting common stock of United Life Insurance Company, Lafayette Insurance Company and Addison Insurance Company. EX-27 4 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 146,932 677,360 709,867 128,698 2,862 0 995,900 2,378 14,430 60,215 1,157,922 714,205 108,296 0 0 0 0 0 35,758 241,450 1,157,922 244,939 61,686 2,676 1,829 164,215 52,380 56,367 38,168 9,436 28,732 0 0 0 28,732 268 268 209,876 183,723 (33,544) 79,449 61,694 218,912 (33,544)
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